I thought he was rejected from SOLDIER,and simply got the position of a lonely guard.Zack became friends with him during training or whatever...

I always thought that the sephiroth cloud fought at the VERY end was simply in his mind.The strong controll over him showed itself to be Sephiroth.All his problumes were linked to Sephiroth.The more he learned about himself,and the less hold Sephiroth had,the more this image in his mind weakened.In the end, Cloud was stronger then this Image, and he struck it down.