Corruption is evil!
Though I'm sure this junked item error I'm experiencing is the result of a corrupt save game, the problem only presents itself when I'm using the Menu Overhaul patched ff7.exe. When I revert to a 1.02 patched ff7.exe, the error is gone.
It problem begins immediately after disk 2.
I downloaded a save game for disk 2 and the error did not occur.
YAMP is the main difference between my save game and the one I downloaded.
I had a YAMP patched ff7.exe for the first part of the game. I reinstalled the 1.02 patch and then the Menu Overhaul and kept playing.
Testing my current hypothesis requires replaying the game from the very beginning with the Menu Overhaul installed.
It'll take me a few hours to get back to disk 2, so I better get started!
EDIT: I never had YAMP and the Menu Overhaul installed at the same time. I installed The Menu Overhaul on a clean 1.02 patched FF7. Unfortunately, I began playing from a save game I had previously created on a YAMP patched FF7.