Way tells the gang that the sword of Fire can be found at the Palace of Punishment, a dark, scary castle. There's an annual criminal tournament there and the sword is the grand prize. Quest and Graer enter the tournament. Just as they are about to win, the grandmaster recognizes Graer as an old enemy and he is disqualified. Nestor takes over as Quest's fighting partner and they defeat the grand champion. Nestor claims the fire sword.