The Sleeping Forest
Items:
"Kjata" Materia, Water Ring
With the Lunar Harp in hand, the Sleeping Forest greets you and lets you pass. There's a Red Materia that keeps appearing and disappearing in the trees. Grab it when it appears and you'll receive the "Kjata" Materia.
In the rocky area is a Water Ring. Pick it up and equip Cloud with it - it'll come in handy later.
You'll soon return to the World Map. Follow the canyon to the City of Ancients.