Are you running Win 7 in 64bit or 32bit? I ran into all kinds of software issues in 64 bit mode with my 32 bit programs. I ran them under the XP mode/Vista modes in Win 7( 64bit) and still had issues.
It was not just Watchout but other software like Photoshop and others.
I reloaded Win 7 in 32bit(ie 86) and Watchout is happy and so are my other programs.
This might be part of the problem...