I'm not so sure about the whole terrorist thing. Although, I suppose you could call Ultimecia and Edea both terrorists, and just about every FF villain to some extent. Just try to refrain from actually labeling them terrorists.

Try to include a lot of the characters from VIII, so we can see your visions as to what happened to them, and what they went on to do or become.

How far in the future is it? If Squall has a son, then its been a long time. Lots of things could have changed. What has happened to SEED recently? Maybe now SEED is kind of like a policing authority. Instead of fighting sorceresses, they instead decide the best course of action to stop threats to the world, your Hyne worshipers for instance.

Include something about memories, and how GF's have affected the memories of Squall and other characters you decide to include from VIII. Maybe a method to counteract the memory loss has come about. It would be really cool to have Squall not remember many of the occurances in VIII.

If you're looking for alternate conflicts, I have a suggestion. You could maybe say that as a result of the time compression "errors in time" start to occur, and maybe past and future versions of the characters and enemies of VIII start to show up through rifts, or something of the such, maybe certain cities and people begin to be affected by problems that Ultimecias time compression has caused to this time period, and Squalls son has to find a way to seal the rifts. Something with the time compression would be cool, There's lots of room to play here.

Going back to GFs, it would be very cool to do a different battle/summons system, and say that the world has since Ultimecias defeat, stopped using GFs because they were deemed unsafe.

This gives me another conflict idea. You could say that the powerful GF's that have lied dormant for years, have been captured by a mysterious new villain, who intends to use them to rule the world. It is Squall's responsibility to see that this villain is stopped, and the GF's are returned to a safe place where no one has access to them. Perhaps this villain is driven insane by awakening these dormant GF's whose power is greater because they have been sleeping for so long. To have this villain start out good and be driven mad, would make a really cool character. Especially if he was close to Couer or Squall.

All in all, I am really intrigued by your aspirations to make an VIII sequel. Do tell what you think of my recommendations.