I don't know about that particular dialog, but in general, Apply applies the changes you've made without closing the dialog, OK applies the changes you've made and closes the dialog, and Cancel closes the dialog without applying the changes.

That's how it's sposta work anyway.

"Apply" immediately applies changes to the configuration, whereas "OK" only applies the changes when the dialog box is closed.

Windows isn't exactly known for it's well-designed user interface.

As an example, on the Display Properties dialog, I sometimes want to see the effect of a change I've made but I don't want to close the dialog in case I don't like the result. So I'll click Apply, and if I don't like it, the options screen is still available for me to make further changes.

Aha. Now it makes sense. It's been bothering me for some time - it just seemed like a bizarre design flaw but now I understand. Thanks!

What mike says, and I don't think it's inherently bad design. In its execution it probably is.

But, anyway, there's lots of cases where you might want to affect a change in something without leaving the interface for making that change. Say, you want to change the color of window borders, but want to try on different colors for size. So you use "apply". When you're sure what you want, and you want to go on to something else, then you use "ok". And, if you don't want to change anything, you use "cancel".

Those three buttons labeled as they are is bad design, I think. "Cancel" is pretty self-explanatory, but "ok" makes sense only because we're so used to it. "Apply" doesn't make much sense, really, but you can imagine how it was a kludge, something added to the "okay/cancel" standard interface. It's better to replace "apply" with "preview" in a dialog box that allows a "preview".

However, "apply" is also used in situations where a number of different changes are possible and you want to do them piecemeal without having to exit and reinvoke that dialog box. Why would you want to do this if what you're really doing isn't previewing? Well, maybe you're doing your changes one at a time because you can mentally keep track of them better that way. Maybe "keep track" isn't the best description, but you can probably see what I meant. Imagine a dialog box that could potentially allow you to make 15 different changes at once. Not 15, but a good example, is a typeface change: typeface, bolding, size, foreground color, background color, spacing, etc. To set all those parameters at once and then press "ok" may be more than you want to do at one time. I don't know about you, but it's sort of scary to me to press that "okay" button when I've changed a whole bunch of different things, so many I'm not sure of everything I've done.

There's also the interesting yes/no/cancel concept, where "cancel" means "I don't want to make a decision yet".

Also note that changes you "Apply" will persist even if you later "Cancel" the dialog box.

I've noticed that users like to click Apply and then OK.
I suspect that microsoft added the "Apply" button because users know that "OK" closes the window, but they don't know that it applies any changes. For wallpaper, this isn't a big deal (There is a visual aid), but for less obvious configuration it gives new users a bit more confidence to have the extra button.

Also, as someone who's struggled with trying to come up with a standard three button combination which allows people to (a) save changes, (b) close a screen and (c) Create a new record, I think the microsoft solution is pretty good.

I know that whatever three buttons I shove down at the bottom confuses the hell out of someone.
What's most annoying is that for every user that really groks a certain combination, there is an almost identical user that anti-groks it. Also, for every screen that fits the Save, Close, Create paradigm, there's another screen which doesn't. Add onto this design decisions with regard modality and you can understand why such a simple UI feature is executed so strangely.

I suspect that microsoft added the "Apply" button because users know that "OK" closes the window, but they don't know that it applies any changes.

The Apply button is also useful when the dialog changes after having pressed it. For example when you change the installed options on a print device (say adding two more input trays). You can't configure those installed options (paper type and size) until you click OK or Apply. It's better to be able to just click Apply than having to restart the dialog.

Irritatingly you can make changes to the windows print configuration dialog and not have it enable the apply button. Always freaks me out.

The thing that drove me completely nuts about Windows for the better part of a year was that in control panel applets, clicking the X to close the window is the same as clicking Cancel -- and you don't even get a confirmation prompt, not that you should of course, the only SANE thing to do is for that to be equivalent to OK. Why in the world Microsoft made X behave in such an unusual fashion on control panel applets is a mystery, but I have successfully retrained myself not to click the X anymore...

If you have found a dialog where "Apply" closes the window (as "OK" would do) then you have found a serious misunderstanding of the UI guidelines and a clueless software developer. The whole point is that it does the same as "OK" except it leaves the dialog open in case you want to make other changes.