I think either:

1. The wound was non-fatal and someone repaired it.
2. The magic used on Squall was imagery.
3. The magic used on Squall had a magical property that allowed it to not actually damage tissue, but strike through it in a magical sense, not injuring skin but causing Squall to black out.

Also, considering the amount of times the guy has been toasted, spiked etc. in battles, a lack of wound is hardly a surprise.

I also disagree about this being better than R=U, although it is certainly a hell of a lot fresher an idea.

As for weird things happening - it's a Final Fantasy game. Not Oblivion. I mean, come on - in other FF games, it's a hell of a lot weirder than FFVIII ever gets remotely close to. While I like how games can generate theories such as these, I don't believe them. It's a bit like fanfiction to me.