Calm down chaps, I just fixed this on my machine:
Navigate to the installation directory of the game. (In my case c
rogram files(x86)\lucasarts\xwing95\)
Right click on the xwing95.exe and call up the properties.
Go to the compatibility tab.
Run in compatibility mode for XP(SP3) and then check: 256 colours, 640x480 resolution and "disable visual themes". That should do it.