Modification is not illegal. Reversing and extracting assets for the purpose of using in another title is. Square knows what's going on here, one of our members works at Square (or at least did). If I own a copy, I'm allowed to make changes to it (or any other byte on MY computer) so long as I don't pass those changes on as my own personal work. Original content (custom models, etc) is also completely legal to pass on so long as no actual copyrighted code/files are passed along with it.
The PC port is a different license from the PSX port. A different team handled it and published it even if it is the "same game". I paid to own the original PC port, not all iterations of FFVII classic ever made ever. Some studios will allow that, but those are almost always the choice of the publisher. Squenix does not do that. As such, there are four or more Playstation editions and three or more PC editions for each region. You pay for one, you get one. Want another? Buy that.