This post was somewhat helpful, but it seems that it was forgetten about, so i'm renewing it in the hopes that someone will have an answer for those that are still having issues running ff7 on win2k.
I also have this same problem. (2k user 2600 amd processor nvidia geforce2 graphics card) My only difference is that when the two guards come after cloud and the battle starts as soon as one of the characters (either mine or one of the guards) begins an attack the game will crash and popup an error that the game window covers and i cant read it.