Alrighty... I have made progress.
I have found how to convert any PSX disk into a BIN/CUE (or BIN/TOC) file on any Linux, making a raw disk format that is interchangeable between computer systems. This means that, starting with this format, we can extract all the files (including the movies) as if it was an archive. You don't have to worry about if a Linux drive can mount the disk, or if the driver can parse CD-XA data. Here's what's cool...
1) We can throw away the CUE/TOC file as it just says that the whole disk is XA mode 2, something we already know.
2) the BIN format preserves the all 2,352 bytes in each sector, as opposed to the ISO format that only saves 2,048 bytes per sector. You see, the ISO format destroys CD-XA data headers that are critical for movie playback. (This is why you can't drag/drop movie files from the CD in windows. These use a special XA mode-2 format that is incompatible with a typical CD-ROM iso9660 filesystem).
The bad part all open source CD-ROM image readers I have seen can't read a BIN image. I'm in the process of modding a filesystem library that extracts files from ISO images and altering it so it can take BIN images instead....After that, I'm going to write an installer that copies the files from the BIN image to the hard drive in FF7's directory structure, and convert the movies from the image to AVI files in one go. That will be the final filesystem that a q-gears or q-gears like application and read universally on any system using simple fopen() commands.
Cool?
--- EDIT ---
You know what would be cooler? After removing all the duplicate files, putting them all into one archive blob that can be read. That would just be cake :3