You’ll need to use the sierraw.exe executable copied from the cd into your kq7 folder rather than the sierraws.exe executable that is installed by default. Also, run in 256 color compatibility mode. If you want the game to run full screen, use run it from a batch file using Multires (free from http://www.entechtaiwan.com). Here’s the batch file I use:
multires.exe /640,480,8 /exit
start /w C:\SIERRA\KQ7\SIERRAW.EXE c:\SIERRA\KQ7\RESOURCE.WIN
multires.exe /restore /exit
where my cdrom drive is d:, multires in installed on c: i the “Multires” folder, and the game is in the c:\sierra\kq7 folder. If you use the batch file, do not use use XP’s own 256 color setting on the compatibility tab.