There are two important things in Yallam. The first is the blacksmith, Sunshine. You will be using him a lot in this game, so get used to coming here. The second are the songs the children in the playground to the right sing. They were written by Yepp, a master boatsman. Although this guide will tell you how to get through the Sea of Time (the treacherous oceans around Lemuria) anyway, the songs are actually instructions for navigating it, so jot them down if you want.
The blacksmith is at the top left of the town. You have to pay to use him, and it can be quite expensive. Any item that is described as Forgeable or a Rusty weapon can be converted into an item. If you're low on money, make sure you forge your Rusty Staff first; it'll become the very powerful Glower Staff. The unleash on it does a lot of damage, although the additional effect of inflicting Psynergy Seal isn't all that useful. If you have the money, forge the Tear Stone as well - you can employ a trick where you save before you give it to him, then if you don't get what you want you can reset and reload, and try again. When it gets to the rarer materials (such as Orihalcon, Dark Matter and Mythril Silver) you will definitely want to do this.
Once you're done, you can Cyclone the patch of weeds to the bottom right of the town for a Nut. Now, leave Yallam to the north and follow the path west (which curves to the south). It's a long one, but eventually you will reach Taopo Swamp.