Steiner and Dagger will not be available for this next section of the game. You will have to replace either of them if they were in your party. Replace Dagger with Eiko if you were using Dagger and replace Steiner with any other character (Amarant, Quina, Freya and Vivi are all viable replacements).
Go down the stairway leading to the left to enter the town proper and, to Zidane’s disbelief, all of the townspeople have tails and hair just like he does. Take an immediate U-turn to the left and take the pathway that goes beneath the stairs (shown in the screenshot below). Follow the pathway over to the right side of the screen to find a treasure chest that contains a Flash Hat. The Flash Hat is a fairly powerful headpiece that Zidane should equip to begin teaching himself the Eye 4 Eye ability.
Go back up to the main town and enter the building on the far left side of the screen. Zidane will mention that this looks like a good place for Dagger to get some rest. A short cutscene will take place with Eiko asking everyone in town for medicine but getting no response. Go back inside the Inn once you are back in control of Zidane and grab the treasure chest at the back of the room for a free Elixir.
Enter the building just north of the Inn. Skip past all of the creatures that look like Zidane casting a spell and go down the stairs. Examine the hole close to the screen to find another Elixir hiding inside.
Exit the building using the exit on the east side of the room and enter the next building on the right. This is the “Storage” room. Grab the treasure chest lying on the ground which contains a Wind Edge. Examine the moving pot on the far side of the room to release Moorock the moogle. Select the Mognet option and Moorock will provide you with a letter to Mozme. The Mogshop is full of new items including:
Be sure to save your game before you leave the Storage Room. Leave the room and then reenter to find that Stiltzkin has now arrived. Speak to him and he will offer to sell you a Diamond, Ether and Elixir for 2,222 Gil.
Exit the storage room and head left back to the area outside of the Inn. Explore the pool of water on the northern shore to find a pair of hidden Angel Earrings. Go back into the laboratory and speak to the Mysterious Girl in red in the basement. Follow her when she goes back up the stairs.
You will regain control of the game as Eiko. Feel free to watch the Active Time Event if you wish (it involves Quina meeting up with Zidane and discussing the large stone in the laboratory). There are more ATEs that appear as you wander around town as Eiko. Speak to each of the other party members as you find them to add them to your party.
Go through the green light near where Amarant is standing and across the bridge. Follow the pathway and speak to the Mysterious Girl along the path to continue the story. The perspective returns to Zidane who reappears at the gate of Pandemonium.