Haven't played 4 yet, so I might wait for this.
Offtopic: Those interested in the size of FF7. I ripped the 3 cds from the PAL version of the game and copied all of them into a single directory, replacing any files that were the same between discs.
Total Size: 1.25GB
Size of Moives: 1.01GB
Size of Game Data: 245MB
So as to the question of whether it could be done....maybe. I'm sure it could be compressed down to fit into 128mb without cutting too many corners, but you are still left with the fact that you need something to replace the FMVs as well.