Eldurin has answered this Q before but to save any searching I have posted his answer for you below..............hope this helps
Your problem is a confirmed Windows 2000 problem with how the town AVI files are read. No one running Windows 2000 has access to this buildings. FOrtunately, there is a fix that will take a little work on your part. Go to the following site and convert your town AVI files to an uncompress AVI. Note that this will make them huge, but you will be able to play the game.
http://www.geocities.com/virtualdub/index.html
Now of course yours may not be a Win 2000 prob if you are running 98se. I had a problem with the game not installing correctly so try an uninstall and reinstall. If it wont uninstall delete the Activision folder then usig the Add / Delete option from the control panel delete Wizards and Warriors. Set settings to 640 x 480 colour to 16bit and close all TSR`s (the ones in the window on your right in the task bat) especially any virus checker. Now reinstall and set the Graphic options in the game to software. If the game now runs you can experiment with the graphic setings but from the results posted various success with the same card is variable.