16Bit surface quality

Im using DirectDraw7 and running in Windowed and Fullscreen. When I set the BPP to 32Bit everything looks perfect, but when I specify 16Bit the image quality looks quite bad with various types of color variations. The Bitmap files are currently standard Windows 24Bit BMP''s. Im using the DDLoadBitmap Code in DDUtil at the moment, is this the problem? Doesnt DDloadBitmap convert the colors properly? Or do I have to convert the 24Bit BMP file to 16Bit manually? If DDLoadBitmap DOES do it properly, then the 16Bit color system is more inferior than I expected, therefore do I have to create my own dithering technique or something? );