Considering that Jenova's tank has been ripped, hacked and slahed to peices doesn't really fit with Hojo letting her loose. She was obviously forcibly extracted from that tank.

Sephiroth needed Cloud. Though Hojo had labled him a failure years before, I think it's safe to say that Sephiroth knew that Cloud turned out quite successful and could be a valuable asset to his cause, hence, after releasing Jenova, he set Cloud loose as well.

I'm all for the "Manifestation" theory as far as Sephiroth goes. But I still think that Sephiroth's unique way of being injected with Jenova cells and Mako (before birth) coupled with all those years he spent in the Lifestream could easily leave him more powerful than Jenova. There's just very little to suggest we aren't after Sephiroth the whole time.