That's not completely true since Windows 7. You need to download the High Resolution mod and set both Fallout and Fallout 2 to 16-bit colors unless you want to play them in psychedelic mode. Still, it IS easier to do that than it is to get Arena and Daggerfall working smoothly in DOSBox.
Since Vista that is. Win7 is almost the same as Vista.
Whatever... It happens to a lot of old games that utilizes the old graphic systems like 256/16bit colours, 640*480 resolution, etc.
I tried to install http://en.wikipedia.org/wiki/The_Neverhood for example and I had the same problem. I fixed it with a patch fortunately.
Somehow Vista and Win7 are running on a different kind of graphic engine or maybe it is DirectX related... I dunno...