Quote Originally Posted by medigodoom
It's right after you defeat Proud Cloud. When you are walking up the stairs to fight Hojo on top of the Sister Ray in Midgar at the end of disc 2, you will find in in a treasure chest there. However, you would have had to have Barret in your party when you first parachute down into Midgar and until you receive the weapon yourself. I hope that helped. (I just did this part a few days ago, lol)
Close. There's a save point at the base of the stairs just after facing Proud Clod. You can change your party there to put Barret in if you don't normally use him. Just put him in your party, run up the stairs and open the chest. The you can return to the save point and change your party if you so wish.

Another hint for that area: pick up the Mystile from the chest on the right-hand side just after the PC battle. You can also steal Shinra Alphas from the SOLDIER:1st if you missed them in the Underwater Reactor.