Now that I've had time to think about it, I can see where you are right about the game being rather bloaty, and with it having strayed away from the mod you originally wanted to make is unfortunate. What you've done with 1.5 may not be what you wanted, but what you have made is amazing. Some of the gimmicky stuff is annoying, but it requires you to think outside of the box. Makes you question what you have to deal with it, and how you can use what you have to your advantage. The small story changes you've made are pretty great as well. It adds more personality to the characters, and bit of laughs. Barret knocking Cloud out after the Materia tutorial still gets me. The passives, and all around stat changes have brought new life to the characters. I'm actually willing to have Cait Sith in my party now.
Though I agree with selius. In your attempt to balance magic, and strength, strength comes out in front late game, especially with Tifa. Her late game is super rediculous with how fast she gains new limits, how fast her limit bar increases, and her insane strength. She's definitely a glass cannon, but with her in your party you can usually kill things fast enough to not worry about it especially with her passive. Aerith can definitely rival her in damage with magic though, but she's normally relegated to being just a healer because of her high magic, and the unwillingness to use MP on anything other than healing in case a monster nukes a party member. Vincent is a pretty decent caster, but using his MP is a bad idea cause keeping his MP as high as possible helps keep him alive. It's best to find the transformation that fits the fight best, and use that against your next troublesome boss (which is so far Deathgigas. so good as long as they don't drain/negate lightening.) Cait Sith and belt out some decent magic, but making him a tank is usually the better call. Throw revive, elemental + needed element for absorb, some status buffs, then enemy skill is really all he needs. That really just leaves Cloud and Red XIII, comparatively though they're better off smacking them around with normal attacks and limit breaking. One thing I can think of for balancing out magic potentially, would be to have magic cost more, do more damage, but have ethers be more rare. That way a player can choose to explode an enemy with magic, but have to wait till they find an inn, or spend a little more time to physically attack them. Cure would have to cost less than attack magic in that case, or have slash-all be a much earlier materia, and maybe only have it slash-all. That way they can choose to use it on a high damage character, or throw it on Aerith to make the most of her healing staves. You could move Flash to be an upgrade to Deathblow and make it a single target ability and on chance. Maybe make it switch between Deathblow/Flash like Throw/Coin did. I feel that would balance that out a bit. Slash-all would also have to be one of those "Only have one" materia's to keep the balance though I think. Vincents shotgun should keep the Slash-all effect though. Vincent doesn't do a lot of physical damage in general so it wouldn't hurt anything for him to keep it. It's also a low level weapon so it wouldn't be very good late game.
I really like the SP system, and wouldn't want to see it scrapped. Being able to customize your characters a bit more can lead to some goofy things like melee Aerith. Will it work? Probably not that well, but it's funny to see Aerith thwack something real hard. I like your second option to change it personally. People usually have a "main 3" by the time you get far enough into the system for it to truly be effective. With being able to select who gets the SP levels, you can form your main 3 better, but also be a bit boned if you haven't been taking care of other characters when they are forced in your party. So that'll force the player to think about careful usage of SP.
Stealing items from bosses is something that, while a chore, I find to be super satisfying when you get that hard to get item. (For example I spent 2 days trying to get Fairy Flute off of Hilgigars in a FF9 mod, and I was super happy after I got it and felt accomplished I was able to keep my party and item supply well enough to steal the flute and beat him.) My one thought is, instead of having the boss have a chance to drop 1 item from a list, is maybe have 1 real good item that you wouldn't get till later, but have it a super low steal chance. If possible throw in a materia a bit later in the game that boosts steal chance (if possible, or cheat it a bit, and make item drops easier as the game goes on so it "feels" like you are getting better at stealing.) Not morphing bosses is completely fine. Especially with more difficult bosses it's more worth to just finish the boss then to try to tempt fate by wearing him down. Especially when you get an accidental crit, or a party counter attacks. Having counter attack would be pointless in boss fights if you had to morph something cause the risk of the counter killing the super low health boss would be too great. So keeping bosses from having morph items is A-OK in my book.
Edit: Blah forgive the grammatical errors, super tired.