Back to Kolima Forest
Head out of the light house and go to Imil. Heal all of your characters at the Inn, and if you want to see a little optional story head to the monasteries to say your good byes to the two children there. Next, head back to Bilibin cave. Backtrack your way in the Bilibin cave and head back to Bilibin. Next, keep heading east through the barricade and into Kolima forest. You'll want to head back to Tret, and if you need help with that refer to the Kolima forest walk through earlier in this FAQ. Once you get to Tret talk to him then give him Hermes' Water that you got from Imil. Suddenly the forest will light up and Tret will realize what he's doing. He will now revive the people of Kolima to their original state. The other lady tree will also use her powers to deduce that the monsters that you fight now were once monsters and that they exist in more horrible forms elsewhere (who would have figured?) Once you're back in command, retreat out of the forest and head to Kolima. Here you can buy the latest upgraded weapons and armor, but there's not much else to do in the town.
Now head all the way back west to Bilibin and give Lord McCoy a visit. The guards will actually call you "Sir" before arresting you. Don't worry, though, you'll just be taken to Lord McCoy. He'll tell you how he's gracious of you restoring Kolima to its original state and lets you pick from one of four of his treasure chests. Thanks to altrongundamcustom of the GameFAQ's message boards for this information: The chests contain, from left to right, Vail, Potion, Psy Crystal, Water of Life. I for one would take Water of Life because you'll find it to be a little more useful than a Psy Crystal later in the game. Now, exit the city and start heading east once again towards Kolima. This time you won't go to Kolima, but instead go well past it. Follow the dirt path around until you get to a bridge. A guard will now open it (he wouldn't open it if you had gone before). On the opposite side of the bridge you still want to continue along the dirt path.