vmware and Windows 95 VM, changing color to 32 bits produces the same as 256 colors.

I am trying to run an OLD game which worked in windows 95. I have windows 95 vmware virtual machine. The game runs in 16 bit color, but can also be played in 256 colors (very bad graphics quality then). Problem is even when the windows graphics colors is set to 32 bits it produces the same low quality as 256 colors, both on the desktop and in the game itself. So actually I am NOT getting 32 bit colors nor 16 bit colors (this option is actually not available in windows config). I have updated vmware tools to latest (but mouse still gets restricted to VM window, unlike windows xp virtual machines). What can be wrong and what can I do? host is windows 7 64 bit with virtualization capability.