Indexed Mode

This mode enables you to convert your RGB or Grayscale Image to an Indexed image. An Indexed image is a image which only can have the colors specified in it's color palette present in the image file. The maximum number of colors in a Index image is 256. If you want to make e.g transparent GIF images then you can only have a maximum of 255 colors since the last color (i.e color number 256) will be used to determine if the pixel is opaque or transparent.

Palette Options

Generate optimal palette:
This is most of the time the best options to create a indexed image with. Gimp will evaluate your colors and create a color palette suitable for the image. You can specify the amount of colors that you want to have in your index image but remember that you can't have more than 255 colors if are about to create a index image with transparency.
Use custom palette:
If you want to use a predefined palette you have to use this option. You have to choose your palette from the drop down menu, by default it's Web palette. The Web palette is the palette used by e.g Netscape. This will help you create web safe index images images (There is some debate if you should index against the Web palette or not).
Custom Palette Options:
Remove unused colors from final palette: If the palette contains colors that aren't used in the Index image you can remove those colors and make the image file size smaller. This is a good option so keep it enabled.
Use black/white (1-bit) palette:
This option will create a "monochrome" image only built up of either black or white pixels.

Dithering

An Index image can only be built up of a maximum of 256 colors. Most of the time this is quite limited and you will not be able to have all the colors in your image represented in this limited color space. The image will look like it is built up of "bands" or "color areas". To make Index images look better you can dither them. This means that you will mix two or several colors to mimic the missing color. The disadvantage is that the image can look like it's built up of "dots".

No color dithering:
Will disable dithering totally.
Positioned color dithering:
This is a option to use when you are dealing with animations (e.g gif animations). The problem with dithering with e.g Floyd Steinberg dithering in animations is that the dithering will not be constant. If you instead use positioned dithering the dithering in constant areas will remain constant across your frames. It is not as good as Floyd Steinberg dithering but is better than no dithering at all.
Floyd Steinberg dithering color dithering (reduced color bleeding):
When you use normal Floyd Steinberg dithering you will experience that the colors will bleed to much . This is very visible when you index gradients, the effect is that the gradient will look unnatural. If you encounter this effect it's advisable to use this option (i.e Floyd Steinberg dithering reduced colour bleeding).
Floyd Steinberg dithering (normal):
This is the best option to use when you are indexing images. It's only in special cases that you will use the other dithering methods available.
Enable dithering of transparency:
Indexed images only have one transparency mode either it is off (the pixel is totally solid) or on (the pixel is totally transparent). This makes it very difficult to index images with smooth transitions from opaque to transparent. When you enable dithering of transparency Gimp will try to mimic the smooth transition by dithering pixels on and off. Note: A good alternative to transparency dithering is the Right-Click|Filters|Colors|Semi-Flatten function.

Index