For those of you with PSN version of FFVII, this wiki article states that, "DLC and PSN Titles are also region locked..." I would assume that this also aplies to PSX titles, though I can't be sure.
I found this thread via Google, as I am also getting this error in FFVII, despite the fact that I have a UK PS3 and my copy is from the UK PSN Store. My monitor is compatiable with basically any resolution I can throw at it up to 1920x1200, so I know it's not that. If I go to Display Settings -> HDMI -> Automatic, then try to play FFVII, I get the 80028F10 error, along with, "You cannot play this game at the current vdeo output setting". The obvious solution to this was to change the resolution manually, so this I did. If I go to Display Settings -> HDMI -> Custom and uncheck 1080p, leaving all others checked, THEN go to play the game... it works. I have a very similar problem with DVDs, where my PS3 stops sending HDMI video and AV audio outputs if I try to play a DVD when my current output is 1080p (i.e. it just crashes. No amount of ejecting or button mashing brings my picture back). I have to manually change to 1080i/720p first and then play the DVD, at which point it upscales it no problem.
I don't know if this will help those of you with non-UK PS3s, you may have already tried a similar method, but it may help some of the others who look here. To me, given the specific circumstances under which it doesn't work, I think it's a firmware problem; with Sony, that's a double-edged sword, since it means it's fixable but also that it may never be fixed.
*EDIT*: After some further research, this blog would suggest that PSX games, even from the PSN, still obey the region lock, despite the age of the post.
This article on Joystiq does a good job of explaining the problems encountered when mixing PAL and NTSC games/devices, which may answer the questions for those of you using SD TVs. It also mentions that this error code is being seen by people for multiple reasons - generally to do with compatibility of one sort or another, be it NTSC/PAL issues because you're playing on an SD TV, or region-related issues.
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