Squall was killed during the assassination attempt on Edea at the end of disc 1. The remainder of the game is his "Final Fantasy" before he passes away.

1. Squall was visibly impaled through the heart by a spike twice the size of the sword Sephiroth used on Aeris. He inexplicably wakes up in disc 2 with no injuries and it's never once addressed after that.
   
2. All of the fantastical elements of the game - moombas, shumi, chocobos, Esthar, flying Balamb Gardens, space monsters, etc - are only introduced after disc 1.
   
3. Squall's romance with Rinoa, defeat of Seifer, and rise to the top ranks of SeeD are all manufactured by his imagination. They were just things he didn't achieve in life that he wishes he could have had before he died.
   
4. Watch the ending. It's surreal and dreamlike as fuck and involves saccharine happy moments with friends and then blurry/removed faces before finally fading to white. The whole thing symbolizes Squall seeking closure before losing his own memories and identity, and Ultimecia basically tells him exactly that.
   

There's a ton more evidence about this on squallsdead.com

I used to find FF8's storyline kind of ridiculous and unbelievable, but this theory blew that up. I refuse to believe that this wasn't done at least somewhat on purpose.