I've got the midi working on XP just fine, it maybe they you haven't got the latest drivers for your sound-card, or you're using the wrong settings on FF7 config.
Try using, if you have got them:
-Midi Driver-
Microsoft GS Wavetable SW Synth
-Midi Data-
General Midi
If that doesn't work, try using 'Windows Update' (located usually on the Start-bar) And scan for any driver updates, or any compatibility updates.
Sorry I can't help you that much, but I don't really know what Sound-card you've got, or anything really.
-Good Luck-