It's not a damaged CD. I've been having this same exact problem ever since I purchased the game years ago. And yes, I have updated to v1.2 These are the following FMVs that are prone to freezing the game every now and them:
****FF8 SPOILERS AHEAD****
CD1
1) Intro sequence.
2) Any sequence in between the Dollet mission (First SeeD mission) and the Night dancing.
3) Edea speech sequence at the Deling City mission.
CD2
Pretty much any FMV from disc 2 is prone to freezing the game, specially the one where the Garden becomes a floating vehicle. Although the Galbadia Garden invasion went by fine in this last playthrough.
CD3
The only one I have had a problem with so far is the one where the three Ragnaroks are taking Adel to the Moon in Laguna's story.
CD4
None that I know of.
The weird thing is that the music keeps playing, but the game engine is completely frozen. Most times I can't even Ctrl + Alt + Del out of it, I have to hard reset my computer and try again.
I'm a computer expert, and I have absolutely no idea what may be causing this. It's definitely not a hardware issue, since any hardware I have tested the game with came up with the same problem. It's not a codec pack issue either, since this game doesn't use them to render the movies. I even left FF8.exe in the excluded list just to make sure. Also not a corrupted file issue, since I've tried downloading the ISOs and the same problem ocurred with them.
My best guess is that it's a bug left unchecked by the Square staff.