Just in case anybody else ends up with this issue I wanted to leave a post for a hopefully quicker resolution. I'm not sure if this is specific to Windows7 or not.
Running the game everything seems to work. I can even launch out into space and fly around and run into enemy ships. However, bullets (fired from machine-guns & heavy kinetic cannons) literally sit where they were fired, never moving anywhere and not damaging ships. Missiles fired fine and damaged ships. I don't know if lasers, plasma, etc are affected by this. The only way I could get the bullets to work was to run the game as an Administrator.

I had the same problem, Run As Admin, did fix the problem. Thank You.

I purchased Star Wolves few days ago, and unfortunately, game has exact problem under Windows 8.1,
But, I have found a working solution on Steam

Edit shortcut properties and add
-32bit : only if you are under win7 64bits
-dxlevel 90
(should look like this: D:\GOG Games\Star Wolves\StarWolves.exe" -32bit -dxlevel 90)

Now, game is working with visible window frames, but it is working. :)

I had this problem and running as administrator solved it, thanks!