I just found the axe in the windmill room, and after exiting I'm confronted by a henchman.
After the dialogue, right before the fight starts, the game freezes. I played this game when it first game out (12 yrs ago?) and I seem to remember this happening before, and I got through it then, as I managed to beat the game. However, I don't remember how.
Do I come back later on when I've completed more of the chapter, or is there another solution out there? I'd love to finish this game again, as it was one of my favorites.

Luckily the serria help page is still about with that bug, hopefully one of the sugestions they have will solve your problem.

http://sierrahelp.com/Games/KingsQuest/KQMoELockups.html

Just found this bug. Aaaah, the good old days of rushed production. Oh wait.......we are living in them.
Switching to first person mode by pressing F2 before leaving the mill works.

I don't know if I should mark this as solved or not, but in case anyone else runs into this, I did find that if I came back to this part of the game later on, it didn't freeze.
I had to start over (because of a bad savegame), and I completed everything I could on the map of daventry and then tried the henchman again. Sure enough, it didn't freeze, I beat the bad guy, finished the realm and moved safely on to the realm of the dead.

That doesn't work.

And what do you mean you "came back later on"? It is impossible to get anywhere in the first chapter without initiating the axe\windmill cutscene...

Switching to 1st person mode by pressing F2 did work for me. I just made sure to do it just before walking out of the mill as suggested. After the bad guy challenged me to the fight, I switched back to 3rd person view. Using Win 7 Ultimate 32 bit.

I'm using vista, but have had the same problem on XP. Seems hopeless to play the game on thos OP's.
Yes! I finally got it to work. What i did was having the game in f2-mode and having the axe equipped. It might also have had something to do with a lot of programs running in the background while playing as well... i seem to remember this bug had something to do with "too much" of either available CPU-power or Ram (that is, in PC's that are "new").

I was playing it last night and I got to this point. no matter what view I was in, weapon on or off, it would freeze and I couldn't close the program without opening the task manager. I got the save off of sierrahelp.com but who ever made the save didn't get two items I already had (the gloves and the crossbow) I really don't want to have to keep retracing through someone elses save because the game is freezing.

Same thing happened to me last night. I tried Ralackk's link, (posted 9/16/10). Clicked on the "MS Visual Basic 6 Runtime update" installed it. Went back into the game and the update worked. Thanks Ralackk!

No worries, I just updated the link with the new URL structure. I assume you copy and pasted the link into the browser?

Yes I did Ralackk. The copy and paste worked. Thanks again

Bugger, I'm getting the freeze after the axe too. I've installed MS visual basic 6 runtime, and I've tried all the other suggestions. Thoughts? Bit peeved that I've paid for about 30 minutes worth of game.

[edit] SOLVED

Nevermind, turns out applying the 1.0.3 patch adds an extra entry to the 'Games' folder in windows vista. Had to run that one instead.