Start by using the Knight's invincibility to drop through the fire.
When you land, head left to speak with the king. He'll need the princess' amulet before the Knight can try to claim Excalibur.
You can now pass the gate before the princess' tower. Head right to pass through and reach the tower.
Climb the ropes and ladders to speak with the princess on her balcony. This will give you access to the tower.
Return to the ground and continue right. Being climbing the ladders and stairs in the tower. Notice the guard on the second floor; he will kill you if you get too close, so stay away for now.
Head to the top of the tower to find a lift. Hop in with the Knight.
Have another party member climb to the ledge above the lift. Use the lever to lower the lift to the second level.
You'll find a Cave Painting here. Check it out, and hop back into the lift. Before you are lowered to the third level, activate the Knight's invincibility.
With the Knight using his invincibility while hanging at the third level, the guard will be occupied firing useless cross bolts at him. Use another party member to climb past said guard to grab the key he protects.
Head right of the tower to find a passage. Drop in to find the dragon's gate. Unlock it with the key, but don't grab his treasure just yet.
Now lower the Knight to the ground (level four) and head into the passage with the dragon's gate. Drop even lower to find some stepping stones beneath the dragon's chamber. You'll also find a Cave Painting down here.
Continue through the passage to find a ladder. Climb and head right to find the other side of the dragon's chamber. Leap toward him while using Invincibility , and he'll occupy himself breathing useless fire at you.
While the dragon is distracted, switch to another party member and grab his treasure. Now head back to the tower.
As you return, the dragon will break loose and kill all the guards. Continue to the top of the tower, and climb the ladder left of the lift to reach the princess' chamber. Use the treasure on the coin slot to gain access.
Enter to find the dragon finishing his meal... the princess. He'll spit up her amulet, which you can now return to the king.
You can only reach the king as the Knight, so switch back to him. As you climb out of the dragon's area, you'll see a sign with skulls. Remember this area.
Return the amulet to the king to gain access to Excalibur. Unfortunately, you won't be able to pull it out just yet.
There was another room with a guard before the dragon attacked the tower. Head there to find a stick of dynamite.
With dynamite in hand, head down the tunnel marked by skulls you saw a moment ago.
At the end of this tunnel, you'll find another Cave Painting. Check it out, and light the dynamite. Place it under the rubble holding Excalibur to loosen the sword.
Use the Knight to draw the sword, and the king will leave to see his (now deceased) daughter. Head left and drop off the cliff to leave this level.