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The problem seems to be that the compatibility mode doen't always work. Generally people who have succeeded in getting ff7 to work have done so by randomly uninstalling and reinstalling the Application Compatibility Update and the Application Compatibility toolkit until it finally decides to work. Sadly I haven't been able to pin it down to any one thing that causes it to happen (I tried a clean build of Win2k on a 2nd partition, and no matter what I tried, I couldn't get FF7 to work, yet it works just fine on the other Win2k partition - never figured it out)
Could this have something to do with the filesystem? My FF7 is currently installed on a NTFS partition. I don't think it will make any difference, but I'll try to run it from a FAT32 partition and see if it works..