Well, at that point, a movie plays, and text is super-imposed on the top of it. What this has in common with the observotory is it too is a movie where text is shown. There's only one other movie I know of like this: When Cloud is talking about nibelhiem, it does a pan-around of Mount Nibel, and Cloud starts talkin about it. But it seems as though you've gotten past that part okay *shrug*
Suggestion: put the FMVs from all three disks in your ff7 directory (or anywhere on your hard disk is fine,a s long as they're ALL in ONE place). Then edit your registry as such:
find HKey_Local_Machine\Software\SquareSoft, inc\Final Fantasy 7 and change the "Movies path" vaue to where ever it is you plopped the movies (I suggest *your ff7 directory*\movies, but whatever, you don't even need them on the same DRIVE, just as long as you point the regestry key in the right place, it'll work).
Try again. It could be that your cd drive is being a bottleneck, and it needs to read the movies from a faster place.
And even if this doesn't solve your problem, it's better having it this way, because you don't have to wait for movie load times ^_^
Lemme know if this solves your problem =)