Production on Final Fantasy VII started in late 1995. After a strict hands-on approach to his series, Sakaguchi stayed in the background for Final Fantasy VI. For the new sequel, he stepped back into the lead with a mystery plot centered around Midgar, the perpetually dark capital city of Gaia, and the familiar themes of rebels fighting a corrupt system, pursued by "Hot Blooded Detective Joe." The player's ultimate goal: destroy Midgar.
That changed when Yoshinori Kitase, director on Chrono Trigger and Scenario Writer for V and VI came aboard.

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VII stepped off the 2D grid and into a breathtaking 3D world, with fully rendered battles and MIDI sound traded in for Nobuo Uematsu's deeper compositions. Super-deformed avatars roamed the world and field maps and switched to full-scale sprites for battle screens, but all were rendered in three dimensional polygons. VII's production team swelled into the triple digits with dozens of new faces working on 3D software packages the veteran FF team had never heard of before. Kitase found himself frankly astonished by what they were trying to achieve, and elated. The size, the scope, the raw passion fueling the entire project swept everyone up. They were coding history, and they knew it.

The floor caved in when Nintendo announced their freshly re-dubbed N64 would be cartridge-based, not CD-ROM. Nintendo's about-face left Square hanging. Their passion project simply would not fit onto a cartridge, and Sakaguchi refused to diminish it. He and Kitase both had long experience chopping game elements to fit Nintendo hardware limitations, but this time they just couldn't do it. They took their epic to Sony instead.
As far as Nintendo saw it, that betrayal made Square the enemy.

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Final Fantasy VII sold over two million copies in its first three days in Japan alone, inspiring retailers to break the release date in America. The RPG genre had been all but ignored in the states; VII built up a massive RPG fanbase in America overnight, almost single-handed

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Sakaguchi and Kitase decided early on they were sick of mechanically killing off and resurrecting lead characters. Death without consequences cheapened everything. Then, during a Sunday night phone conversation with Kitase, Nomura suggested they "kill Aerith and bring out Tifa" as the lead heroine. The idea stuck hard... too hard for some devastated players, who insisted there absolutely had to be some hidden way to bring the cheerful young woman back.

The confrontation with Sephiroth launched with the chilling operatic bombast of One-Winged Angel, the centerpiece of Nobuo Uematsu's thrilling score. Sephiroth's final summon shattered the entire solar system before it even hit you, and it took Cloud's final Omnislash Limit Break with his Ultima Weapon to hack his nemesis part.

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Despite the praise, Sakaguchi and Square prepared to move forward with different PCs, brighter settings and a lighter story in Final Fantasy VIII. They didn't realize they weren't quite done with VII yet.