Liek the guide said, you can either use the blank iso or rename a USB drive or hard drive to FF7DISC1. The converter and in extension the game, just needs to have a drive called that, so it can virtually see that the CD is inside your drive. I never tried leaving the CD inside, but I am guessing it would work if you did. Would give you a feeling of the past, when disc would keep spinning while we played games XD
I never player vanilla after I found bootleg/7th Heaven. I never had a problem with the game because of 7th Heaven. I did have problems running the game, but it was a bad configuration on my side. At least on windows 7 I do NOT set any compatibility options, when using 7th heaven that is. I did that only way way in the past when playing the game vanilla, without mods. Like Yuffie said, sometimes the converter throws errors. Better pay close attention to it.