Right after some long winded trial and error and forum searching i appear to have this working properly, so i thought id compile what i found here to make it abit easier for you guys.

Right here goes.

First install X-Wing and if you like TIE-Fighter

Next install this patch http://www.lucasfiles.com/index.php?s=&action=file&id=653) it covers both x-wing and tie-fighter i believe. (i found this fixed a problem where the game would crash while trying the start the tutorial missions)

Download this file to correct the colour issues and black spots this game can suffer
http://www.jkhub.net/project/get.php?id=1804)
either extract it to or drag it from desktop after extraction to the directory where your XWING95 application file is.

Now i have changed the compatibily of my game to xp sp3, run in 256 colours, run in 640 x 480 resolution, and Disable visual themes.
To do this go to your start bar, find lucasarts in the programs, got to the x-wing folder then right click the x-wing icon this will then bring up a menu just click on the compatibility tab and change the setting i mentioned before, apply and onto the final stage.

(read this bit through first before trying it as to save any panicing)
In windows 7 this is quite simple, CONTROL-ALT-DELETE and get task manager up, go to processes and find explorer.EXE then end process, this will make your desktop dissapear.
On task manager still go to file and click new task, then browse your way to program files in c:\ then the lucasarts file and x-wing, open up the xwing95 file and tell task manager to run it, you will then be able to start the game.

Once your done and exit the game go to the file, new task, on task manger and just type in explorer then click ok and it will bring up your desktop again.

You only need repeat the task manager part to get back in the game again.

For older version of windows as im not sure how much it differs when using task manger i'll quote this post:

"Originally Posted by Wildstar
A workaround has been posted elsewhere: Start Task Manager, kill the explorer process, then do a File>Run and enter the path of the game's executable. When you're done and want your desktop back, go back to Task Manager and do a File>Run>explorer

The workaround works because the old games do not know how to make the new Win7 API call to hide the Taskbar, which appears to be the cause of the color problem."

Please bear in mind i have only used this with x-wing i havnt tried TIE-Fighter so i dont know as of yet if there are some still existing issues, i will post if it does work though

hope this helps guys, happy gaming