I originally was able to sort out the glitched colors on Win7 64-bit simply by setting the mode=4 in the ddraw.ini file (thanks to another forum Fallout fan's advice). However, I noticed that the game ran very slow and the mouse was very choppy. After some internet research I found someone that suggested renaming the ddraw.dll file, so the game doesn't use it at all, to fix the slow and choppy gameplay. This indeed fixed the problem and the game ran smooth. However (as you might guess) the glitched colors returned. A bit more research and I found a patch called "Fallout FIXT" that, when used in conjunction with renaming the old ddraw.dll file fixed everything. The game now runs with proper colors, you can set it to various resolutions, it runs nice and smooth, and even the cut-scene videos work as originally intended. It's perfect. ;)
One important note is that once Fallout FIXT is applied any old saves won't work any longer, You will have to start a new game. So it's better applied before you start playing.
Here's the procedure:
1. Download "Fallout FIXT" from this location:http://www.nma-fallout.com/forum/viewtopic.php?t=57362
2. copy the file to your Steam Fallout folder:
example path: Program Files (x86)\Steam\SteamApps\Common\Fallout\
3. Run the file and follow it's installation directions.
4. Rename ddraw.dll (in the same Fallout folder) to f1ddraw.dll (or whatever name you prefer).
5. Start Fallout from Steam as normal.
You can set the resolution you desire in the options screen, the default is 800x600. Fallout FIXT is a mod to the original game, however it's very well done and stays faithful to the original story and gameplay (the changes are mainly subtle and for the better).
It's very important you don't apply any other patches or mods other than Fallout FIXT. It has all the proper patches and resolution mods built-in and any other patches or mods will glitch it.
PS: I found another procedure that fixes Fallout 2 to run perfectly also, however it's a different patch and requires a few more steps. It can be found here:http://steamcommunity.com/app/38410/discussions/0/828938354804435204/