Indexed Color mode produces 8-bit image files with at most 256 colors. When converting to indexed color, Photoshop builds a color lookup table (CLUT), which stores and indexes the colors in the image. If a color in the original image does not appear in the table, the program chooses the closest one or uses dithering to simulate the color using available colors.
By limiting the palette of colors, indexed color can reduce file size while maintaining enough visual quality for certain applications like a multimedia presentation or a Web page. Limited editing is available in this mode. For extensive editing, you should convert temporarily to RGB mode. Indexed Color files can be saved in Photoshop, BMP, GIF, Photoshop EPS, Large Document Format (PSB), PCX, Photoshop PDF, Photoshop Raw, Photoshop 2.0, PICT, PNG, Targa, or TIFF formats. (See Converting to indexed color (Photoshop).)
