This is a known bug with Jenova editor. Once you have used Jenova to edit your game save, Sephiroth's weapon becomes broken. It has been a while since I had this issue and I cannot remember the proper work around in detail but it revolved around giving Sephiroth a new weapon with Jenova editor. I think one of Vincents weapons works.
The only draw back is the animation and sound will be vincents but it should get you passed this dragon.
edit: Didnt bother reading ALL replies and I should have

But anyway for future reference yeah, it is a Jenova problem.