Hello,
I'm experiencing a problem very similar to something I've seen with Age of Empires II on Vista and later Windows systems. Colors are either inverted or just shifted into the ugly zone, making everything a discolored mess.
Found out this was caused by Aero interference, and since Aero runs in explorer.exe, killing explorer before launching the game makes everything display fine. I have since written a batch file to kill explorer and start the game, and later restart explorer when the game exits. This appeared to work well.
However, after 20 minutes or so, I'm noticing that the game is going squirrely on me just as if explorer/Aero were running. I am forced to save my game and restart. It's getting really annoying, and I was wondering if anyone experienced similar problems and knew how to solve it. I assume that this kind of distortion must occur with many old games that use a specific type of graphics or something, and hopefully I'm not alone. Anyone else know the best and easiest way to keep the distortion at bay for good? Thanks!

Have you tried disabling visual themes or desktop compostition for the game from its shortcut properties?
Also another random trick that can fix odd colours in win7 is if you right click your desktop and open the screen resolution window. Leave that open and then launch the game. I have no idea why that fix works but its worked for a number of different games.

I just set those settings, and played a short game. So far so good! I was unaware of these, thanks for mentioning them. They certainly sound like the kind of settings that should fix this issue. I suppose I'll report if they turn out not to work, but I'm optimistic.

It still happens occasionally. Right now I'm running with the TAUCP. Oddly enough, I can now reliably make the issue disappear simply by hitting Tab, opening the Options panel, and hitting cancel. As soon as I hit Cancel, the graphics return to normal and I can unpause the game and continue. Huzzah!