Okay PS. Here's what I do to get FFVII running on Windows XP:
1. Install FFVII without DirectX 5 or the Movie player that comes packaged with the installer. (Just install the items that are required by the game). But do a FULL install when asked.
2. Install Official 1.02 Patch. available here: http://forums.qhimm.com/index.php?topic=4351.0 The official patch is half-way down the screen.
3. Now is where you choose whether you want the high resolution patch or not (I'm writing this with the assumption that you do).
So download the Hi-Res patch (both the patch for 1280x960 and 1280x1024 are in the zip file). Available here if you don't have the patch: http://forums.qhimm.com/index.php?topic=5327.0
Also for your convenience, the Hi-Res patch has been packaged with the Windows XP chocobo patch, so the game will not crash at the chocobo races during that part of the game.
4. After you've applied the patches, go to your ff7 configuration file and open it. In the file go to your "Graphics" tab and make sure "Direct3D Hardware Acceleration" is selected in the Renderer pull down. Make sure Display Resolution is set to 640x480 16bpp (Full Screen). And finally make sure the nVidia box is Checked and the TNT radio button is selected. The page should look like this:
5. After applying all of this, you still may find instability in playing Final Fantasy VII. One thing that helps resolve instability, is to set compatibility mode for the FF7.exe. To do this, go to your ff7 directory the default path is: C:Program FilesSquare Soft, IncFinal Fantasy VII
In that folder find the FF7.exe file and right click on it. Go to properties>Compatibility tab.
In this menu, click the check box that says: Run this program in compatibility mode for, and then select Windows 98 in the drop down box.
Click apply and that should clear up some or all of your issues if the game is randomly crashing.
The things I just listed are things that are necessary (sans the Hi-Res Patch) to get the game to run properly.
Here's some more tips for the game if your still having issues:
If your movies aren't playing correctly or they are playing upside down, you'll need what's known as the "Duck" Patch. This will correct the upside down movie problem experienced on some PC's.
Available Here:
http://aaronserv.dyndns.org/hosting/ffsf/downloads/ff7betap1.exe
Another tweek you can do, is if you think the movies are playing too slow or choppy, you can have the movies play from your HDD instead of your CD-ROM. To do this, read this FAQ on the subject (I have my movies set up this way and it works great).
http://www.ff7-universe.com/Downloads/FF7Movietweak.txt
That's all the information I have on the subject. If you're still having troubles, register over @ qhimm.com in there forums and someone should be able to help you.
Using the Hardware in my signature, this game plays flawlessly for me on Windows XP Professional SP2. I have no reason to believe that it cannot work for you as well. Good Luck. :)
EDIT: One flaw in the game that I forgot to talk about is, once you exit the game after you're done playing or whatever, you must go into your Task Manager and under the processes tab, kill the process FF7.exe. For some reason even after quitting the game and you're back at the desktop, the exe does not want to close.
I've noticed other people having this same issue, and I don't know of a work around for it. I just live with it and remember to kill it after each session playing.
EDIT #2: These steps should work the same, if you're running Windows 2000 Pro, but there are added steps that need to be done for setting compatibility for the .exe. There's a write up over @ qhimm that better describes the steps to get it to work properly on that OS.
EDIT #3: I found out today, that my uncle is not able to use FSAA when playing this game with his Radeon X850XT Video card, if he does use it, he'll get the grid-line effect that makes the game look absolutely awful. This seems to apply to everyone using an ATi based video card as 8-bit Pallete textures are non-existant in ATi drivers. However, he says he is still able to use "Adaptive AA" force enabled in his video card drivers.