I have the same problem with Windows 2003 (effectively the same as WinXP). I apply Windows 95 compatibility mode, but it still says it needs Windows 95. The compatibility mode appears not to apply, and I don't know why.
I hope someone else knows how to solve this.

Well,
 
Just apply the compability mode on the "Setup.exe" and "Launch.exe" files and run the "setup.exe". When the red screen appear, click "alt + f4" and install the game.
 
I'd like to ask for your help too... I installed and played the game correctly, but, when it's running, there's just no sound!
 
I'm not fluent in english, but I know that it's very much easy to understand the conversations when there's a conversation...

This is an interesting thread, I just dug out my resident evil cd and have managed to install it using compatiblity mode in windows 2000 sp4.
 
However there is a choice of long obsolete graphics cards to choose from when installing. I just picked one (orchid righteous I think - I used to have one!)
 
Now the game refuses to start. I see the '3dfx' and 'virgin interactive' logos but then the program freezes in a blank screen, after a while I get a message that it failed to display video.
 
Any ideas?
 
Would love to get this working.
 
AartaXerXes
 
Edit: Forget the above, I tried Matrox Mistique in Launch.exe options and it worked. but I too have no sound!

This is a funny issue, because I can play it with sound, I just picked any of the 3Dfx cards "BUT" when I play with Jill, after you kill the first zombie and u run back to the guy and the guy kills the zombie "again" they talk and it freezes... but I think noone has a real answer to these problems