Aeris has gone to the Forgotten Capital. She has left you her accessory (if one was equipped) and all Materia. Now your path leads to the northernmost continent. The Bone Village is a place marked by big dinosaur bones sticking out of the forests there. Here you find a lot of archaeologists. They say Aeris has gone this way and, incidentally, so has Sephiroth. They also tell you, you can't get through the Sleeping Forest without the Lunar Harp.
The archaeologists are willing to help for a little bit of money, specifically, 100 gil per person. Ask them to dig for the Lunar Harp, then set up each of the archaeologists in their places. The Lunar Harp is somewhere on the top plateau in the Bone Village. It's not terrifyingly difficult to find, just ask them to dig for Lunar Harp and determine its location. Once all five have been set up, each archeologist will turn to face the place where they think the item seems to be. Move Cloud to the point where their lines of sight meet, then hit the button. After the digs, you can then retrieve the item from the box on the front of the tent.
If you choose "good treasure" you can find a nice gun called Buntline. It's also possible to find a weapon, Mop, for Cid. You can also find a Megalixar. However, you will find it a waste of money after you acquire Buntline and Mop, as all you will ever get is a potion worth 50 Gil. Thus, it's not worth the 500 Gil per search.
Later in the game, you can come back here and dig up things you've missed, like if you didn't get the W-Item materia while in midgar on disc 2. You can also find the "Key to Sector 5" here, which you will need to get to a couple items that cannot otherwise be acquired.
The Forgotten Capital
There isn't a great deal of stuff to do in the Sleeping Forest. On the first screen, the Kjata materia is floating through the branches. Grab it. On the second screen, there's a box containing Water Ring. This is also a great place to train if you want tons of AP. After the next screen, you make a brief jaunt to the world map, and as you head further north, you find yourself in the Forgotten Capital.
There's not much to do here either, and you don't need to explore this place much right now, as you'll return here later. You can find some things here though - most notably, you can find another Enemy Skill materia on the right side of the town, behind the last bed in the house with the beds. If you do go left from the moment you enter, you'll find a save point in the house along with a magic source. If you keep going past the save point, you'll end up in the center of the city and obtain an aurora armlet.
You need to sleep(which would be forced) in this house where the enemy skill was found and in the middle of the night, Cloud wakes up and says where Aeris is. Specifically, in that prominently placed big house in the middle. Head there via the central path. On the top of the spiral, you'll find a Comet materia, which at this point of the game is a very good thing to pick up.
Head down the glowing blue path. After a long stairway, you reach a save point and a platform where Aeris seems to be praying. This is your chance to get ready for a boss fight. Give someone in your party an Edincoat, or something with a lot of summon spells, Heal and Life, and the Water Ring you found earlier.
Cloud heads up alone and eventually Sephiroth kills Aeris. Sephiroth explains a lot of rather odd details on his plans, and Cloud is clearly not ready to take in this situation. Then it's time to fight yet another weird part of the creature Sephiroth calls his mother.
Afterward you learn that Cloud has been a puppet of Sephiroth the whole time, and the disc ends.