I also have a Parhelia 128 and AE 7 works just fine.
Check off the game and 3D settings in the Matrox PowerDesk, maybe that will help.
The Parhelia does not support Open GL in AE7 only in AE 6.5.
Copy the .vob you want to use to your HDD and rename it to .mpg. Now you can import it into AE. If the video contains ac3 audio install an ac3-filter on your pc.