Decoding does not equal encoding. Here's a better way of putting it... PSX discs are not called CD-ROMs for a reason...
The format of the disk is different. First, they are XA mode 2 disks, which use more data per sector. In the case of video/audio, the data is not saved as "a file" but the psychical format of the disk changes. In order to create a disk, you MUST use a bin/cue format (As all sector data is retained in that format. The ISO format chops off the XA headers and damages the disc in the conversion process). After that you are going to need to find a program that writes Sony/Phillips Audio-video XA/mode 2 data to particular sectors CD-ROMs, normal programs and many burners can't...
On top of which, FF7 doesn't use filenames to look up data, but manually moves the CD-ROM read head to a physical location of the disk. You are going to need to find the look up table from the game that translates the movie number into the physical sector address of the disc and layer... All without overwriting other data (Also hardcoded to physical sector locations on the disc)
Windows has semi-support for XA format, but movies will choke if read because the data on those sectors are "corrupted" to the computer. The only way to read the movies is to put the drive in "raw" mode and read the whole sector, when you do that, you lose filename support... This is why movies have to be "extracted" from a disk to be played. Emulators are different because the put the disk in "raw" mode and the reads are handled by the PSX bios (Which is one of the many reasons why the BIOS is required for emulation to work). Emulators also have their own built-in XA drivers.
IN a nutshell. If you want to reverse-engineer Sony's MDEC encoding process, making sure that all the DCT transformations are in spec for proper MDEC chip playback, compressing and placing the superblocks in the right sequence in a special sub-sector CD-ROM format, all this while not overwriting the data on the disk that can not be moved, more power too you. The fact you are asking us is proof you can't and *surprise* we can't either! It uses Sony's proprietary format that we only know about from barely legal 3rd party information. Heck, I even have the format wrong in my PSX doc, and that's about as "authoritative" as you can get on how the PSX works without signing an NDA with Sony themselves.
I invite you to prove me wrong... That would be *very* cool as it will help answer some question such as where the sector look-up tables are in the game. If we had the ability to re-author and re-master the disk, that would be very awesome! It is, however, a problem that is much to difficult for us to really care about.