Quote Originally Posted by PresZidane
1.What did Kadaj do the water at the forgotten city and why did he want the children to drink it.
When Sephiroth returns at the end of the movie, he is able to literally evoke a "Dark Lifestream"--the corrupted Spirit Energy of those people who died from Geostigma--and blacken the sky. At various times in the movie, Loz and Yazoo are also able to use this Dark Lifestream; in such cases, they summon up the Shadow Creepers. Presumably, Kadaj would also be able to control it. That being the case, it was most likely that Dark Lifestream which blackened the water. This makes even more sense in light of the fact that it was a combination of water and Spirit Energy that purged Cloud's Geostigma, whereas the Black Water intensified Jenova's effects.

2. Why Loz and the Other Guy to take the children back to migar after the forgotten city incident.
In addition to being "siblings" to the SHM and thus would-be participants in the planned Reunion, Kadaj, Loz, and Yazoo also intended for the children to lead them to the "head of Jenova." Since the SHM did not know where it was, and the Jenova Reunion Theory states that Jenova's cells will come back together, they believed that the children would head to it, and thus lead them to Jenova. This was why Kadaj had them drink the Black Water at the Forgotten Capital--it activated their "Reunion instincts."

3. Are Aerith and Zack alive in the ending?
No.