Thanks for the help Wildstar. Unfortunately, I've tried both of your suggestions and I'm still running into the same problem. Running XWING95.EXE directly instead of going through the launcher results in the same problem and re-installing x-wing didn't help either.
Might I be installing the compatibility fix incorrectly? Do I need to run it from the Program Files/Lucasarts/XWING95/ folder? Do I need to run it before installing x-wing? The readme for the fix mentions going into a "compatibility administrator" for installation on windows 2000. Again, I have XP on my machine, but might this be something to look into? How do I get to the "compatibility administrator"?
Again, if I set the compatibility mode for XWING95.EXE to win 95, I get an error about not having a joystick plugged in. Is there anyway to get around this error? Maybe if I try running it as win 95, it won't crash out on me.
Thanks again! I hope I can get this working eventually; I'd like to see x-wing with the improved graphics, but at least I still have the older version of x-wing running!