Your next destination to continue the story is the Underwater Reactor which is located in Junon, but there are a number of side quests that you can do at this point in the game.
Most of these side quests can be saved until you reach the end game content at the end of Disc 3 but you do have the option of completing them at any point now that Cloud is back in your party:
Return to Nibelheim
Head back to Nibelheim to play Tifa’s Piano to receive her Level 4 Limit Break, Final Heaven.
Key to Sector 5
Dig up the Key to Sector 5 in Bone Village so that you can get back into the Midgar slums and pick up some weapons for Tifa.
Chocobo Racing and Breeding
Gold Saucer is open for business from this point forward so you can now breed and race your own Chocobos. Check out this section for more information. This side quest is much easier to complete later on in the game.
To reiterate, many of the quests listed above could and should be saved until later on in the game after you have completed the story mode - especially the Chocobo Racing and Breeding side quest which is much easier once you have more expendable gil.
Travel back to Junon and enter the town from the side into Under Junon.
Speak to the guard standing in front of the elevator and pay him 10 gil to take you to Upper Junon as this is now the only way to reach the city on the surface.
Walk down the streets and the team will notice that the large cannon in Junon (the Sister Ray) is no longer there.
Continue walking westward until you reach the area in the screenshot below. You will hear the sound of a whistle from some marching Shinra Guards when you reach the right area. Walk towards them and they will all run away.
Follow them and pass through the doorway (labelled “1”) into the elevator. You will be thrown into battle against two Shinra Soldiers (listed as Submarine Crew in the game.)
Exit the elevator and you will have to fight two more Submarine Crew soldiers. Follow the passageway. There is a 
Save Point in the third hallway. Ride the next elevator down into the reactor.
Travel to the end of the hallway and then follow the pathway along. Press the red button on the far side of the elevator to reach the actual Underwater Reactor itself.
Follow the walkway along past the submarines and into the next hallway where you will find another Save Point. Use this Save Point to save your progress as there is an upcoming boss battle that is fairly difficult.
You have a few more Shinra Soldiers to fight in the next area. You can fight the first Soldier by himself or you can run past him and you will be thrown into a battle from both sides. The very last group of Shinra Soldiers that you fight are a special type of soldier called Underwater MP Soldiers (shown in the screenshot below).
You can steal a piece of armor called 
Shinra Alpha off of them. This armor has fairly strong defense against physical attacks and mediocre defense against magic attacks, but is definitely worth picking up on your way through.
The Huge Materia will be carried off into the red submarine in the next screen. Walk a few steps forward to continue the story by talking to Reno. The next boss battle is against the robot standing behind him.
HP: 24,000 (Arms: 10,000)
Reward: 
God’s Hand
The two most difficult aspects of the boss battle against Carry Armor are:
1) Its attacks deal a high amount of damage
2) It can pick up your party members and hold onto them preventing them from participating in the battle
Make sure that you keep your party well healed and that you are proactive with using Big Guard from your 
Enemy Skill Materia. The most devastating attack is called Lapis Laser which can deal as much as ~1,500 damage per party member.
Focus your attacks on the arms when Carry Armor traps one of your party members. Alternatively, use spells and attacks that hit both the center body and the arms at the same time, including 
Comet Materia or Ultima Materia if you have leveled them high enough, or some of the Enemy Skills from your Enemy Skill Materia such as Magic Breath, Aqualung or Trine.
A video demonstration of this battle is included below for reference:
Carry Armor drops the God’s Hand weapon which is an excellent weapon for Tifa.
It does not have much room for Materia but it has very high Attack stats and Attack % which means that it can never miss. This makes it perfect to pair with Deathblow Materia which will make her attacks either a critical hit or miss entirely - with God’s Hand she will have a critical hit with every attack.
Take a left before you go towards the other submarine and grab the 
Battle Trumpet weapon for Cait Sith out of the treasure chest at the end of the dock.
There is another treasure chest near the submarine that contains a 
Scimitar for Cid. This is one of the best weapons in the game for leveling Materia as it has triple growth, but there is not much use for it just yet.
There is another treasure chest at the very end of the dock that has the 
Leviathan Scales which are a key item for use back in Wutai. Proceed up the stairs and do battle with the Shinra Soldiers blocking your pathway to the submarine.
It is not possible to return to this area to collect the Leviathan Scales. Make sure that you pick them up before boarding the submarine!
Save your game at the Save Point inside the Submarine and then proceed into the bridge when you are ready for the submarine battle mini-game. Click on the next button below for more information about the Submarine fight.
