Cloud's relationship with Sephiroth begins as one of distant admiration. At the height of the Wutai war, Sephiroth is Shinra's most decorated SOLDIER; a famous war hero. Reading about Sephiroth's heroics in the papers is what inspires Cloud to join SOLDIER, hoping he too will find fame and the respect of the people of Nibelheim.
What Cloud does not know is that Sephiroth is literally engineered to be that perfect SOLDIER during the Jenova Project. Sephiroth himself only learns of the circumstances of his conception when ordered to lead an investigation of one of Shinra's rural reactors, which coincidentally doubles as one of the science branch's secret research centers. Driven to insanity, Sephiroth massacres the remote town, burning it to the ground.
Both the reactor and Shinra's hidden lab are located in Cloud's hometown of Nibelheim. Needless to say, this lessens Cloud's admiration in the man. Moreover, Sephiroth's violence introduces the circular theme of fallen idols further perpetrated by the Buster Sword and carried into Cloud's relationship with his own adoptive son. Sephiroth's rampage flies in the face of everything Cloud had admired and to which he had aspired. The added misfortune of the tragedy taking place in Cloud's hometown makes the SOLDIER responsible for taking everything from Cloud; not just his physical possessions, but his home, his family, his hopes and dreams.
a side note
The extras of the Advent Children DVD (international versions and Japanese Advent Pieces) contain several variations of the final battle between Cloud and Sephiroth in which Cloud, desperate and disgusted, brings up the fact that he once admired the SOLDIER. This dialogue was cut, despite being relatively short in length and the footage itself not being too dissimilar to what is in the final film. The fact that the team decided not to include this reference to their past seems a little strange in a story revolving around Cloud's fear of history repeating itself from his own failures. The deliberate omission of this dialogue suggests that he no longer dwells on Sephiroth's betrayal, despite the film and novella's more subtle (and far less fatal) comparisons to that relationship with that between Cloud and Denzel. With the upcoming Blu-ray re-release having more distinct visual references to the Nibelheim disaster, I'm curious to see if the dialogue wiggles its way back into the Complete version.
Linked
Even with his spirit (and probably a few bones) crushed, Cloud cannot escape Sephiroth's looming shadow. Sephiroth's desertion of Shinra left a vacancy in the Jenova Project, and Shinra scientists hoped to recapture the success of their previous specimen in Sephiroth Clones. This was done by continuing their experimentation on other SOLDIERs and presumably anyone else that fell their way after a Shinra cover up; the latter group included Cloud. These experiments included included the injection of Jenova cells which -- unbeknownst to the scientists -- Sephiroth can actually. Thus Cloud is infused with a"second person" who submits to Sephiroth's control, handing over the pivotal black materia and almost killing Aerith himself. This understandably takes a toll on Cloud's psyche.
Ironically, Cloud is the only one able to defeat Sephiroth. Even as a guard, Cloud's the one that successfully delivers a crippling blow to the madman, and eventually drops him to his death with the last of his strength. However, for all intents and purposes, Sephiroth cheats death, refusing to become a mere "memory", as he declares.
The appearance of Sephiroth -- even the simple mention of his name -- charges dozens of emotions within Cloud. The admiration and envy he held as a child when reading of the great warrior, the call of revenge, and the ever-present (though often denied) cloud of fear. Even when it seems he has been defeated, there's always the threat that he will somehow take away everything that is precious to Cloud.
In Advent Children Sephiroth threatens to do just that. When he finally has Cloud pined him to a slab of debris with the Masamune, he asks what Cloud holds dear so he may crush it. As images of loved ones flash before his eyes -- Zack, Aeris, Tifa, Marlene, and Denzel -- Cloud suddenly realizes what exactly it is that is important to him: everything! This leads to a new revelation: to his precious everything, Sephiroth is nothing. Sephiroth refuses to be a memory, and yet he also refuses to be seen on the same level of what was once his fellow man. He exists only to destroy and to torment.
For the first time, Cloud feels pity towards the other man.
Sephiroth is seemingly all powerful but he has nothing to live or fight for; he has lost all sense of purpose. His lack of respect or understanding for what is important -- the all encompassing "everything" -- is what finally gives Cloud the confidence to defeat his greatest enemy, possibly for good. Sephiroth may a strong -- if not fully terrifying -- opponent in battle, but Cloud has always been the better man. He has the heart and soul to counteract Sephiroth's aimless need to destroy. Considering this, Cloud realizes that he will be the one to emerge triumphant, and Sephiroth will likewise be retired to the confines of his memories.
In Conclusion
Because I can go on for pages without actually saying anything, and -- to be honest -- I really don't care for Sephiroth, Nao offered to help dissect the complexities of this relationship that has become such an integral part of the franchise:
"Sephiroth is crazy and Cloud is too, so they try to kill each other and their friends a lot. Cloud killed Sephiroth, so his crazy brothers try to kill Cloud on motorcycles! It's kinda like Grease, except there aren't any musical numbers. :("
