Originally Posted by
Skies
You will notice that every piece of gear of yours has a bar in it's status display that says 'Spiritbond', when that bar is full (there's a white swirly thing that appears too) it means that it can be converted. Once you have a Materia Assimilator (which requires ANY class at level 18 minimum, and a quest) then you can transform those items into materia by going to the inventory menu and clicking on the item and then clicking on 'Materia' (must be done on the inventory menu and not equipment menu)