How does materia even work, giant orbs, don't fit into 1 inch wide holes.
Well you see, you can squeeze them into a much smaller form. So when they install those they're compressed down to fit into the slots. The pressure from the materia trying to restore to its full size in the slot helps to keep it firmly secured so they don't fall out when you're swinging your weapon around.
Aren’t materia malleable? I remember in the movie they were pretty much just rubber balls, given the sound they make hit, and having been said they were just condensed ball of Mako I had assume they have both a solid and liquid-ish form that let them be absorbed easily into weapons and people.