In this room use a Deku stick to light all the torches and move to the next room.  Watch out for spiders falling from the ceiling in this room and use your Deku stick to burn away the webs covering the exits.  Crawl through a hole to move on.  Now you're back in the first room of B1.  Push the block into the water and fall down to the torch you used earlier.  Light your stick, climb up the block and then use the stick to burn the web in the floor (attack with the stick).  Climb or fall down the hole to the next room.  There are three bush guys here.  You need to knock them out in order.  First the middle one, then the right one, then the left one.  Then go on to the boss's room.

Deku Tree Boss: Queen Ghoma

Use your C Up button to look at her and let her see you.  Now wait until she drops down and stun her by either throwing a Deku nut or shooting her in the eye with your slingshot.  Then hit her with your sword while she's stunned.  She'll crawl up to the ceiling.  Now there's two things you can do at this point.  You can either wait until she drops some things and kill them before they hatch, then wait for her to come down and repeat the above process.  Or, while she's getting ready to drop the things her eye will turn red.  Shoot her in the eye with the slingshot while she's up there and she'll drop down and be stunned, so hit her with the sword and repeat.  This way is quicker and you don't have to deal with the dropping things if you're a good shot with the slingshot. Pick up the heart container she drops when she dies and walk into the blue light.

The Market:

After the story sequence leave Kokiri forest to the East.  On your way out you'll get the Ocarina from Saria automatically.  Head for the market.  Use your map subscreen if you need to find it.  Explore the market for a while and when you're ready move on to the Hyrule Castle grounds.