I suspect this is entirely due to GOG enforcing Windows 95 Compatibility Mode on MM7 exe, which they do not do with MM7-Rel exe. Interestingly, I get the exact same sound problems if I use Win95 compatibility with MM6, but they are completely absent when I run the game normally.
So I thought, fine, I'll just use MM7-Rel exe. But then I wanted to install Grayface's patch, and it occurred to me that it's only the MM7 exe that he's modifying, and I'm not going to see any of the bug fixes if I use MM7-Rel exe. Sure enough, based on the much sharper sprites that I see when I run MM7 exe, that appears to be the case.
I would really rather not have to choose between the bug fixes / convenience features of the Grayface patch but messed up sound vs an unpatched but listenable game. I know I'm not the only one who's had this issue -- I'm really hoping somebody at GOG will give us the key to remove this Compatibility Mode enforcement: pretty sure that's all it would take to fix the problem. Or if any Windows savvy person out there could tell me how to get rid of it, it would be much appreciated. And just to clarify -- after reading another post where somebody had this issue -- the option to turn off Compatibility Mode is not grayed out; it's just that after you do it and close the window, the exe resets itself to Win 95 mode.
(Running WinXP SP3)