Supposedly, somewhere in the copyright law (if I were still in my Ethics for Computer Science I'd have the link somewhere), there is something that says that if you use copyright protected material, it's okay if
*you use only small pieces of it, and your work can be considered fully independent of it and is used as homage/parody
*the same as above, but as long as it's for education
And the line gets fuzzy when your work can give you profit. Most likely, if you make money off of it, you would have to pay some royalty or ask for some permission, because now you're making money off of it.
You WILL be in legal trouble if:
*You used pieces of another work and your work is almost indistinguishable from the original
*Your work can compete against the original (so, say the original piece was a comedy and you make a comedy based off it, if you end up covering the same grounds as the original, or outright copy it to the point where it's stealing, you are in legal trouble).
This hack, would probably fall under the latter, since it's an attempt to create a version of Final Fantasy VII for the NES, with characters, themes, and quotes from the original. Then again, the rom that it itself is based off is already grounds for legal dispute.
I'd link you, but you could just look for homage/parody copyright law (I'm at work, see... procrastinating!). Anyhow, I had to write about this for the above mentioned class.