I don't know would my suggestion be helpful, but I have resolved described problem this way:
1. I've downloaded and installed the following update 1.20 http://www.galciv1.com/download.asp
2. I've do the following:
a) put a galciv.exe file(not a gcmenu) to the desktop of my Windows 7 as a shortcut;

select it with the right mouse button and choose "Settings" then "Compatibility" tab
c) there should be chosen a "Windows 98/Windows ME" compatibility and the mark of administrator rights should be set, press "Apply" then "OK"
3. Run the game with this freshly generated shortcut and start a scenario then go to "Options" and set "Show player battles" and "Show AI battles" to OFF
It works fine for me on Windows 7 x32 bit and there is no issues described above.
I play not an Altarian Prophecy, but an Expanded Universe expansion.
PS Sorry for my english
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