1) How does the W-Item trick work exactly?

2) Earth Mallets are items that cast Quake3 when you use them. There's a monster called the Gigas that randomly (and rarely) drops them after you defeat it. I missed them the first three times I played through FFVII.

3) They are encountered only in the area where you're running down the Crater rim. It's one of the rare times in the game that the view is sideways scrolling. You only encounter Grenades and Gigas there.

There's a Ribbon in the caves in Gaea's Cliffs. That should give you a second Ribbon and two characters can be protected against Bad Breath.

4) You may be right. I managed to get 18 of them after about 5 hours before I gave up.