Spike

If you want to increase the color depth in the Windows Virtual PC called “Windows XP Mode” (like I’m running inside my Windows 7 Professional):

1. In the Windows XP operating system (remote system), click on Start menu, then Run.
2. Type GPEdit.msc to open Group Policy Editor.
3. Navigate to Local Computer Policy -> Computer Configuration -> Administrative Templates -> Windows Components -> Terminal Services.
4. In the right pane, double-click on the Limit Maximum Color Depth setting.
5. In the Properties dialog, select radio button of Enabled, and then set Color Depth value to 24 bit or Client Compatible
6. Click OK when done.
7. Restart the Virtual PC.

Enjoy

SOURCE:
How To Increase Color Depth and Quality of Windows XP Accessed Via Remote Desktop or Terminal Services