I think DOS MAME just does a straightforward pixel-for-pixel downsampling of the 16bpp values.
No, it downsamples the colour palette.
If the game uses 16bit/32bit RGB then dosmame uses a fixed r3g3b2 colour palette.
If the game uses 16bit palette entries then dosmame generates a new reduced palette every time the palette changes. Some games need more than 256 colour palette entries but they don't need 256 different colours. If by removing duplciate colours the palette still doesn't fit then it matches duplicates on less bits of the colour.
Some games you really notice the loss of bits, others it's not so bad ( bombjack looks ok but it only has 128 colour palette entries ). You may be able to get better results by taking into account which colours are used on screen and generating a new palette for every frame, but this would be alot slower.
The real benefit is the amount of data that needs to be sent over the pci/agp bus is halved ( for dosmame another advantage is that you can use teaked vga modes but that isn't a major issue for you ).
smf
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