For the first part of this part, you must move Milanor to below the westernmost gate, at nighttime. You will be given the Imperial Armor, and you will no longer be allowed to use Milanor in clashes. And moving Milanor next to an enemy will cause a game over. You have to at least kill one of the Valkyries in order to win, so get some Nietzsche/Durant/Roswell up there to deal with her, and then move Milanor out for the win. Killing all enemies does not win you the battle, but it nets you some overrated items and some EXP and POW.