I don't know anything about that kind of modding, but when a program doesn't run on a newer Windows, you can try launching it in compatibility for an older Windows (like 95, 98, NT 4.0, 2000, etc.). Right click>>Properties>>Compatibility, then check 'Execute this program in compatibility mode for:' and select the O.S. needed; once done, right click on the Milkshape's icon, and then click on 'Execute as administrator'.
You can also search for a version of that program that works with windows 7, I Googled 'Milkshape 1.6.4 for windows 7', and I think there is a version called 'Milkshape 3D', that works fine for windows 7... I hope I helped you, good luck!