mfx: Thanks, I feel a bit unsure about the quality of the alphamasking.
Mugwump: The graininess is caused by multiple stages of dithering from several different parts of the renderer.
The sieve effect is due to the palette. The closer to the palette a 32-bit image is, the more balanced the colors gets (
example).
#14014: I've tried this once, and it didn't look good. At first it worked well, when I was using only one 2x2 kernel for the texture and another 2x2 kernel for the lighting, but once things got more complex it got too distracting.