The other interpretation is that Squall’s mind is in its final throes, and in its last moments is failing to recall faces, descending rapidly into chaos and jumbled, manic flashes of traumatic memory. Squall desperately tries to replay his memories, focusing ever-harder on the obscured faces, and only having them slip away. And in hindsight, it is rather evocative of Eternal Sunshine of the Spotless Mind, and if I gave the authors of this game the slightest amount of credit, I might have bought this theory. But I don’t.
Look, it’s cute. I’m proud that you came up with it, and really, it’s better than what was intended. I can appreciate you finally realizing that FF8’s plot is so bad, you’ve invented a better one as a coping mechanism. But it doesn’t really work. Other stories with “crackpot” theories like this (Minority Report, Total Recall) hold more water, and were likely pitched as alternate endings. But look at the story you’re telling if the “Squall’s Dead” theory is true: Squall attempts to assassinate the Sorceress, fails, gets impaled, dies, and…then what?
He’s dead. The dream is ultimately meaningless. Nothing really happens in it that impacts the “real” world. Maybe Squall gets some internal closure, but so what? The Sorceress wins, rules the world, has her would-be assassins summarily executed, and evil triumphs. Hardly a fulfilling close to the story, wouldn’t you say? Not much of a story; a bunch of untrained, untalented pissant mercenaries attack the most powerful, evil sorceress in history and get completely annihilated.
Huh. Okay, I’ll admit that does sound more likely.