Upon returning to the Underground Shelter in Mobliz, you'll discover that Katarin has gone missing. The kids will also mention that she is pregnant. Further, Duane and Terra are not present either. Head over to the Injured Lad's House where you'll find Duane. Follow the dog to the Injured Lad's Shelter and within it, Katarin and Terra. They'll give you some background on what's going on, but soon enough you are interrupted by yet another attack from Phunbaba. Head outside, stopping to collect the Ether in the pot on the north side of the room on the way.
You will first take on Phunbaba with your full party. He has the same capabilities as in your last fight, including Bolt 2, Bolt 3, Blow Fish, and Solar Plex. He may also counter attacks with Bolt 2 this time around. As before, you can exploit his weakness to Poison with Bio. This is a straightforward fight that is interrupted when you've dealt at least 10,640 damage. At that point, Phunbaba uses BabaBreath to remove two randomly chosen Characters from battle. The battle ends at that point, after which Terra joins the fray. As with when Edgar joined, she is automatically equipped with "optimum" equipment, but no Relics or Esper.
The final battle with Phunbaba is similar to the first three, except this time you have to actually cut through all 26,000 of the fiend's HP. Terra is in a permanent Morph state for this fight, and if she knows Bio she can use it to devastating effect. Keep yourself healed up and pound away at Phunbaba until he's dead for good.
After the fight, the children of Mobliz will see Terra's Esper form for the first time, and their reaction helps her realize that she can help them by fighting. She remains in the party, adding a valuable asset to your team.