Microsoft Knowledge Base Article 301911 contains the following introduction:

This article describes how to use the Program Compatibility Wizard. The Program Compatibility Wizard prompts you to test your program in different modes (environments) and with various settings.

For example, if the program was originally designed to run on Microsoft Windows 95, set the Compatibility Mode to Windows 95, and then try to run your program again. If the program runs, the program will start in that mode every time. You can also try different settings. For example, you can test with a 256-color display and a screen resolution of 640 pixels by 480 pixels.

Most programs run correctly on Windows XP except for some older games and other programs that were written specifically for an earlier version of Windows.

If you are experiencing problems with a program that worked correctly on an earlier version of Windows, the Program Compatibility Wizard helps you select and test compatibility settings that may fix those problems. If a program does not work as expected, run the program in one of the compatibility environments.

Warning Be careful when you use Compatibility Mode to bypass version warnings in installation programs. Some programs are designed for a specific operating system. By design, such programs prevent the use of later versions. Typically, these programs are system tools (such as antivirus, firewall, CD-burning, disk management, or backup software) that run at a very low kernel mode. These programs can cause serious problems if you install them.