So, during Disc 2, Sephiroth appears but he is encased in a crystallized chunk of Materia. Is that the real body of Sephiroth, and the one floating around on the surface of Earth is a clone or something? I've never truly understood that part.

From what I've interpretated it as is that it's Jenova, being able to morph into different forms, who morphs into Sephiroth. So yes, that's the real body of Sephiroth in the chunk of materia.

Pretty much what Kapten said :)