I just encountered this problem on Win10 with a newly intalled GOG version as well as with an old retail installation which did run properly on Win7.

Narzoul's "DDrawCompat" did solve the problem. Another tool "dgVoodoo 2" recommended by [url=https://www.pcgamingwiki.com/wiki/Age_of_Wonders:_Shadow_Magic]PCGamingWiki[/url] did not help in this case. Also the tool "WineD3D for Windows" did not help.

Also I had a problem after switching to windowed mode using the F5 key in-game. I could not switch back to the initially selected resolution of 1920x1080. After closing the game the setup program AoWSMSetup.exe displayed "Window" as the only remaining option. This problem is solved on the PCGamingWiki page (e.g. set the compatibility mode of the setup program to "16-bit (65536)" color mode).
Additionally you can switch to windowed mode and back generally by using the Alt-Enter key combination.

At least, GOG starts the game using "AoWSMCompat.exe". This is the save way. If your game installation is not located in one of the "program" folders you may use "AoWSM.exe" instead. This starts the game much faster.

All this works with UPatch 1.4 and MP Evolution 2, too.

Where do you put the file???