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The default setting for JPG image quality is 85 percent. You can change this value by editing the aimsms.cfg file located at <ArcIMS Installation Directory>\Server\etc on Windows and $AIMSHOME/etc on UNIX.
Open the aimsms.cfg file and change the value of the parameter "jpegquality". Note that the value defines the percentage of quality and not compression.
<parameter name="jpegquality" value="85" />
<parameter name="giflicense" value="GIF keycode" />