I highly doubt the battle arena is supposed to be beatable in this mod. If you want omnislash, just add it with an editor, or earn it with the editor disabled.
I posted the best way to get Omnislash in this mod a few pages ago:
Head to the battle arena JUST BEFORE you fight Schizo at Gaea's Cliff. The enemies will be Disk 1 enemies, still tough, but you've got plenty of good equip by now (such as the Dragon Armlets from the Blue Dragons in the room before Schizo).
Give Cloud a Dragon Armlet , Enemy Skill (with the most skills learned, Dragon Force, Death Force, Mighty Guard, Bad Breath, Magic Hammer, White Wind,
?, Frog Song are essential), Counter Attack, the higher leveled HP Plus materias, Restore materia and Destruct materia for DeSpell, plus Mug+Added Cut (ghetto Double Cut). If you manipulate the slots (
http://www.youtube.com/watch?v=uGNYMHdE4ks) it will be easy to get 10k BP a pop. Also, be sure to buff up with Dragon Force and Death Force on the first battle of the arena, plus wear a Peace Ring, and have plenty of restorative items around (for statuses, Remedies stolen from the Velcher Tasks near Rocket Town are a must)