Two years after the events of Final Fantasy VII, the planet has begun recovering from the devastating attack from Meteor, while the survivors of Midgar have begun to build a new city on the outskirts of the old metropolis. However, a strange disease known as Geostigma has arisen. Children seem to be especially prone to developing the condition, which is proving to be universally fatal.
After his showdown with Sephiroth, Cloud Strife established his own delivery service, the Strife Delivery Service, with the aid of Tifa Lockhart, with whom he has been living in Edge. Marlene Wallace has been entrusted to their care, and also with them is an orphaned boy named Denzel. Unfortunately, Cloud and Denzel are two of many suffering from Geostigma's effects. As a result of this, and because he believes that he is unable to protect those he cares about, Cloud has now secluded himself from the world, as he doesn't wish to be a burden on those he loves.

Cloud is attacked by three mysterious young men who believe that he knows the location of their missing mother; however, the battle is cut short and he escapes. Hoping to gain information on the mysterious attackers, Cloud responds to the summons of Rufus Shinra, the leader of the seemingly defunct Shin-Ra Company. Rufus, claiming that he wishes to make up for the decay his father's company brought to the world, can only give the name of the trio's leader: "Kadaj." After their meeting, Kadaj breaks into Rufus' lodge, dispatching Rufus' bodyguards with ease. Kadaj demands that Rufus himself tell him where to find his mother, revealing that "she" is, in fact, the remains of Jenova, and is somehow connected to the cause of Geostigma. He also announces that he and his "brothers," Yazoo and Loz — whom he identifies as "remnants" of Sephiroth's will and spirit — are planning a new Reunion that will culminate in an assault on the Planet itself.

Kadaj and his "brothers" begin collecting children infected with Geostigma, and take them to the Forgotten Capital of the Ancients. Cloud attempts to rescue them, but fails and must be rescued himself by Vincent Valentine. Vincent reveals to Cloud what the trio are seeking and that it could result in the return of Sephiroth. He also reveals that Geostigma is the result of one's immune system working excessively to fight off an infection of Jenova cells. After some soul-searching and a lecture from Marlene (who managed to escape from Kadaj's group while they were fighting Cloud) the reluctant Cloud agrees to return to Edge and face Kadaj in direct battle, now with renewed confidence in himself.

Shortly thereafter, in Edge, the villainous trio call forth several monsters to attack the populace, including the dragon summon known as "Bahamut SIN." While the other Final Fantasy VII party members (Tifa, Barret, Red XIII, Cait Sith, Yuffie Kisaragi, Cid Highwind and Vincent) deal with Bahamut, Reno and Rude attempt to take care of Yazoo and Loz until Cloud arrives. Through their teamwork, Cloud and his friends soon dispatch all the monsters summoned, culminating in the destruction of Bahamut with the aid of a team-sized fastball special.

While overlooking these events in a nearby building, Rufus reveals to Kadaj that he has been in possession of the head of Jenova all along, tossing the box containing it from the edge of the building. Kadaj dives after the box and recovers it. Rufus himself survives the fall when Elena and Tseng launch nets to catch him. Both had been captured earlier by Kadaj, tortured, and subsequently rescued by Vincent. Before Kadaj can celebrate his good fortune, he spots Cloud in hot pursuit of him. An intense motorcycle chase carries them into the ruins of Midgar, first across the old highways. Cloud catches up to Kadaj and they slide off of the end of the unfinished highway and they take a dramatic stab at each other; Kadaj's stab reveals the extent of Cloud's geostigma infection while Cloud's attack stabbed Jenova's head. They then went into Aeris' old church where Kadaj sees the extent of the damage to "Mother" and lets out an anguished scream before Cloud arrives. They confront each other and Cloud comes off worse for it until a magical blast from Kadaj destroys the flowerbed and releases an outflow of seemingly lifestream infused water which heals Cloud's geostigma and proves inimical to Kadaj who flees. Cloud, impelled by Aeris' voice, pursues him to the derelict remains of Shinra Headquarters in the center of Midgar. Now healed of his debilitating condition, Cloud is able to match Kadaj blow for blow and soon defeats him decisively. However, before the battle can come to a complete close, Kadaj tricks Cloud by distracting him with the box containing Jenova's head, which Kadaj then jumps after and absorbs into his body to "...show [Cloud] [his] reunion". As Cloud jumps down after him from the heights to deliver a lethal killing blow, Kadaj begins to transform. Just before impact, Kadaj raises his hands, and Cloud is stopped in midair by the abruptly revealed Masamune in the hands of a fully regenerated Sephiroth, cuing the entrance of the new One Winged Angel music.

After a fierce battle, Sephiroth knocks Cloud against a wall and rams his Masamune through Cloud's shoulder. Sephiroth asks Cloud to tell him what he holds most dear, and asks if Cloud would give him the happiness of taking it away. This gloat proves to be a fatal mistake, as an enraged Cloud declares that there is nothing that isn't important to him, and while Sephiroth is left suspended in mid-air after their fight is renewed, Cloud separates his sword, the First Tsurugi, into its six pieces, an performs a new Limit Break (identified as "Omnislash Version Five," a variation of Cloud's ultimate Limit Break from Final Fantasy VII), which soundly defeats Sephiroth at last.

Sephiroth dissipates, leaving Kadaj's severely weakened body behind. Aeris' spirit begins to pour healing rain across Edge, curing the sick children — as well as the reformed Rufus Shinra — of their Geostigma. Speaking softly to Kadaj, who now lies dying, Aeris tells him to be at rest. Believing Aeris' voice to be that of his "mother," he complies and is joyfully taken by the Lifestream. Before a full-scale celebration can begin, however, Cloud is shot through the back by Yazoo, who, along with Loz, is now being taken or possibly destroyed by the healing rain. Yazoo and Loz prepare one final blast for Cloud, resulting in a large explosion that disintegrates them and engulfs Cloud.

Cloud appears surrounded by a white light. A hand lightly brushes his forehead. He softly calls, "mother". Aeris' voice is heard, asking why everyone was calling her mother. Zack replies that they must be very fond of her. Aeris says that Cloud is too big to adopt. Zack tells Cloud that he doesn't have a place there. Several small hands touch Cloud and he opens his eyes.

Cloud awakens in Aeris' old church with wounds healed, now surrounded by his friends and the citizens of Edge. After a moment, Cloud demonstrates the healing powers of the water pooled in the church by curing Denzel of his Geostigma, and then the remainder of the afflicted children. A celebration follows as the healed children surround Cloud and shower him with adoration. He then looks up and sees Aeris crouching by some other children. As she stands and walks to the doorway, she turns back to assure Cloud that he's all right now, and then steps into a white light with Zack. With a smile, Cloud agrees with her, stating that he isn't alone.

(Reference: http://www.adventchildren.net/ff7ac/movie/info.php)