ok i just want to clear a few things up here
One Half says that:
How exactly Sephiroth managed to come back is never explained; where Kadaj, Loz and Yazoo came from is never explained; how Kadaj became Sephiroth is never explained; the full story of Geostigma is never explained; the plot holes from the
game were never covered up nor explained, and how Aeris and
Zack continue to exist is not explained.
SO lets start with the three
grey-haired men. As the movie puts it, they are 'remnants.' They are in fact physical manifestations of Jenova's memetic legacy within the lifestream, sort of clones of a person's genetic remains, except instead of genetic, they are 'memetic' clones (born out of Jenova's or
maybe Sephiroths
will). the fact that Kadaj visibly disintegrates into part of the lifestream when he dies suggests that he was not born from a mother's womb, but directly from the lifestream which still contains the presense of Jenova who exerts some influence over the lifestream and Sephiroth (who is physically dead). Kadaj became sephiroth because when he took Jenova's
head into himself, the jenova cells with their form changing capability did what ultimately would be in their best interest to survive and changed Kadaj into the greatest soldier ever to live in order to fight
cloud.
Geostigma also links into the presence of jenova cells in the lifestream. When the lifestream, summoned by aeris, burst out of the planet to fight against meteor above midgar in the end of FFVII, the jenova cells within the lifestream infected many of the people in midgar. geostigma is the result of the body's own 'lifestream' trying to fight off the invading jenova cells, as explained by
vincent.
aeris and
zack continue to exist in the lifestream (and in
cloud's memory/dreams), simple as that. if you are a christian and/or believe that people have a soul and there is such thing as
heaven, think of it that way.
as for plot holes in the
game - some things in the
game are deliberately left ambiguous (i.e whether
cloud ever loved aeris), many things are left for you to work out yourself and ARE NOT spelled out to you in black and white, some things can only be seen by backtracking or exploring every nook and cranny. that and
vincent is by far the coolest character in the whole series.