Then it jumps straight to the Jenova*DEATH death, instead of every other point that you fight Jenova- where 'Sephiroth' throws a piece of it at you. Once you beat it, the black materia is on the ground.
Then Tifa says, after a little bit more exposition
This is literal. Taking a look at what happened:
1}'Sephiroth' attacked the party there, and it wasn't referring to itself in the first tense. Earlier on in the game we know that he did refer to himself in the first tense.
2) Cloud & co. defeated it.
3) Once defeated, it disappeared, and the Black Materia fell to the ground.
Put two and two together to get the idea: The person that the party has been chasing has never been Sephiroth.
Need further proof? Here's exposition from Ilfana, who describes Jenova as
this means that
Jenova, and it's pieces, can take the shape of any being that it wants to.
Everything ties together. Despite all of Sephiroth's powers, he doesn't have the ability to transpose himself as an image. He stuck in materia at the center of the Northern Crater. What he can do however, is control Jenova because he himself has a whole bunch of it's cells in his body. So yeah, it's a plot twist that nobody really gets that solves a whole bunch of plot holes in the earlier plot.
Also, it means that Jenova, not Sephiroth, killed Aerith.