Opening movies play fine but when I get to the main menu the colors look psychedelic and the options are offset (if I want to click new game I have to click to right of the new game option). I've installed Arcanum along with the unofficial patch & the hi-res patch. I've updated to the latest Nividia drivers and I've also tried running the game in compatibility mode. My systems specs are...

Windows 7 Ultimate 32bit
4 Gigs of Ram
Intel Core 2 Duo at 2.4 GHZ
NVIDIA GeForce 8400 GS 512MB DDR3

That sounds like what happens to me if I use the OS default DirectDraw instead of the provided ddraw.dll. Some of us over on http://www.gog.com/forum/arcanum_of_steamworks_and_magick_obscura/arcanum_windows_8_issues_lag have ended up trying alternative ddraw.dll implementations to solve a different problem; perhaps something like WineD3D would help you too.

Ok I've downloaded WineD3D.exe. Does WineD3D replace all DirectX 8 & 9 system wide or does it build dll files that I can place in the Arcanum folder. Hope this question makes sense I'm not sure how WineD3D works.

You don't actually need the full, all-in-one installer. You need to put ddraw.dll, libwine.dll and wined3d.dll into the Arcanum folder. (It's possible to extract files from an .exe installer, e.g. with 7zip. There's a ddraw.dll already in the Arcanum folder that can be renamed or moved.) However, chances are not all versions of WineD3D will work, and I think the 1.4.1 download lacks a ddraw.dll altogether. I'm using 1.1.38 (and running Arcanum with the -no3d flag).

I fixed it not sure what did it exactly. I removed the hi-res patch (which solved my color problem) started and saved a new game. I then exited the game reinstalled the hi-res patch and everything is working now. Thanks for your time and help.