O.K. here's the rundown:
The girl that stole your materia is yuffie... She obviously hasn't joined your party yet (which you could have done earlierby wondering around in the forests until you fight her)
Watui is a completely optional area in the game but since she has all your materia it looks like you're gonna do this quest now.
Yuffie is hiding in spots all around watui
You need to locate each of these spots to have her run to a new one until she runs into Da-Choa.
Follow her up into DC and eventually you'll she her captured by Corneo.
Defeat Corneo's thingy
Yuffie is freed and gives your materia back.
At this point you don't have her so i don't know if she'll join your party or not but you then get a chance to challenge the 5-story pagoda, which is another completely optional thing.