FINDING DIAMOND WEAPON
After the Huge Materia part of the story, you'll be prompted to go to Cosmo Canyon. Climb up the place once again and talk to Bugenhagen in the observatory. After a few scenes, you'll have the Huge Materia floating; if you have all four and
Bahamut and Neo Bahamut, interact with the blue one in the bottom right to get Bahamut ZERO. Interact with any of them and select "go down" to leave.
Next, go to the Forgotten City north of Bone Village; you can land the Highwind on the ice leading up to it. Head left, then follow the path on the new screen to the fork and go right. Stay on the top level and go around to continue the scene. Next is finding the Key to the Ancients. Take the submarine as far northwest as you can before diving. You're looking for a tunnel in the sea wall; keep turning around, because it can be incredibly difficult to see it at some angles. The key looks pretty bright compared to its surroundings and is visible from outside the tunnel.
Take it back to Bugenhagen in the Forgotten City, watch the scenes, and prepare. Set everyone to have the strongest lightning attacks possible, typically either Bolt3 at this point or Trine, and prioritize Silence resistance. If you have materia that you need to level, equip your best double or triple growth equipment, as you get 3,500 AP from this fight. Optionally, set Steal so you can lift a unique weapon off of him. Save when you're back outside. Once you try to board the Highwind, Diamond Weapon will attack.DIAMOND WEAPON
The only interesting thing about Diamond Weapon is that apart from Limit Breaks, physical attacks do no damage at all. You need to use Magic, Summons, or Enemy Skills to get the job done. He has 30,000 HP in total.
Bolt3, Trine, and Bolt2 are your most powerful options in this fight and will wipe the floor with him pretty soon. If you don't have this option, Limits and Summons will add a point to a hidden counter. Once the counter reaches 2 if he's above 15,000 HP and 3 if he's below 15,000, he'll use Countdown. Once Countdown reaches 0, he'll use Diamond Flash, which reduces everyone to 1/8th of their current HP and inflicts Silence. This move can't kill you, but can leave you one basic attack away from dying.
Diamond Weapon drops nothing, but you can steal Rising Sun, a double growth weapon for Yuffie notable for being the strongest double growth weapon in the game.