If you're having problems with the sound effects, I highly doubt the MIDI driver is the culprit . . .
I've seen this problem a lot in the past. (Before you try this, make sure the volume in the game isn't somehow turned all the way down for the sound effects . . . I've had stuff like that happen to me before.)
Anyway, alot of times, the audio codecs that come with Windows seem to be the problem. Go to Control Panel -> Add/Remove Programs. Under the Windows Setup tab, one of the components will be Multimedia. Select that and click the details button. Another Window will pop up with a bunch of sound and video components. 'Audio Compression' is probably the first one. (It is on Win98, anyway. If it's not the first thing, it should still be in there somewhere.) Uncheck that box to uninstall the codecs. (If the box is already unchecked, that probably is your problem in the first place . . . just check it off, insert the Windows CD when it asks, restart your computer, and you should be fine.) Tell it OK, then restart your computer. Then go back to where you just were (Control Panel -> Add/Remove Programs -> Windows Setup -> Multimedia components) and re-check that 'Audio Compression' box. Tell it OK. (it'll probably ask for the WindowsME CD. If your computer came with everything pre-installed, and all you got was a Recovery CD, you should be able to enter 'C:\WINDOWS\OPTIONS\CABS' at the prompt when it asks for the CD . . . most manufacturers will put the setup files there.) Then restart your computer again, and try running FF7.
Hope this helps! Maybe Threesixy knows something more (I seem to remember him having an exact method to this.) He'll probably reply when he sees this topic.
---Edit---
Ah, I missed what Goku said up there about the MIDI playing back through WAV. I've never run into that before (with the creative SoftSynth, or the YAMAHA), but I suppose it's possible. I guess this is why the YAMAHA SoftSynth also installs a WAV output device. If that does turn up being the problem, you can try using the YAMAHA synth's WAV device for your Sound driver (although Aaron's method of using the YAMAHA synth as your MIDI device is, IMO, much better than this solution. The YAMAHA SoftSynth will give you the best possible MIDI playback with your SoundCAred.)