Stunner: if you can't get the Launcher to run, try editing ue_options.cfg manually. Change the numbers so they read:
2,640,0,0,100
This will setup UE to run at 640x480 in 16-bit D3D, which you shouldn't have a problem with. If you have a Glide card instead of a D3D one (you don't mention either way) make sure it reads:
3,640,0,0,100
which will set up UE to run at 640x480 in Glide mode.
(FYI, ue_options.cfg is usually written by the Launcher, and it's numbers have the following meaning: driver, resolution, figther_distance_patch_on/off, capship_distance_patch_on/off, asteroid_patch_limit [100 to 500 range, more than 500 is possible but heavily recommended against]. A patch in the UE dll then reads ue_options.cfg and patches the EXE on the fly with the given options)