After falling from a bridge, you find a sword and return to Potos.
When you arrive in Potos, go to the shop (just south of where you entered town) and buy a Bandanna. If you can't afford it, you can either go back to the forest and fight Rabites until you have enough, or just wait and buy it later.
Press Y to go into the menu to equip the bandanna. If you don't equip it, it won't protect you. While in the menu, you can press up or down to switch menus, and press left or right to move between the options. Press B to select an option. Press Y again to exit the menu.
Visit the Elder
When you are done exploring town, go to the house in the northeast corner. Talk to the old man. He says that the rusty sword is actually the Mana Sword. Your friends become very upset, because the Mana Sword had been protecting this area, and pulling out the sword caused monsters to appear now that the protection is gone.
Elliott starts beating you up. Then an earthquake makes a hole open up in the ground. You and Elliott fall down into the hole and you must fight the Mantis Ant.