Did you try installing the upside-down movie patch? Movies worked fine after I did that, but I got this error after the opening Eidos movie:
Great. Not sure if that's just a general FF7 problem or a problem with WMP10 (since I just now installed FF7 to check it after reading this, and that looks like a null pointer problem heh
), but I think I'll just stick to ePSXe for now :-/