What an awesome idea! I hope it is possible. Could be pretty cool. Since FF8 has detailed NPC characters, could use them to replace all FF7's NPCs.
Heh, could even replace Zack with Squall! That would be interesting... Also, doesn't Rinoa look a little like Tifa in Advent Children? My favourite was Quistis though. Mmm, Quistis. Shame she wasn't important to the story after the first 1/4 of the game, no sub-quests or character development.