Back to the Water Palace
After you obtain the Dragon Fang by defeating the three-headed dragon in Memorial Cave, you must return to the Water Palace. If you managed to grab the ID card from your first visit, you can simply walk up to the front gate and show the ID card, and they will lower the drawbridge for you. Otherwise, you'll have to return to the Heavenly City, go back to the castle, and fall through the hole in the clouds behind the castle walls.
Once you arrive, head straight to the king and talk to him. Merely glimpsing the Dragon Fang will be enough to convince the king to part with all of the treasure in his castle. Now you can head to the lower right corner of the castle, and you will be permitted to examine all the chests that you can find. In the very first room alone, you'll find a Lamp, Antidote, and empty chest, and a Stone. Stones are very heavy and very worthless, so drop them from your inventory immediately.
From this room, there's a path to the left, and a door above. If you take the door above first, you'll spot five chest scattered around. In them, you can find Ointment, a Club, a Stone, Expensive Medicine, and an empty chest. Drop the Stone. It's doubtful you will need the Club, and the Ointment is a joke item. You can hang on to them and sell them when you get the chance (the Ointment goes for over 1000 crowns), or you can drop them. This area continues to the left where you'll find three more chests. In them are a Brush, a Stone of Warrior, and a Yumi Doll. This particular stone isn't as heavy and it's actually quite useful. If you didn't already by one in the Heavenly City, using this stone can increase your offensive powers. The other two items are joke items which can be sold or dropped.
This leads the small path to the left off the very first room with treasure chests. Follow the path and you'll find the last two treasure chests. One is empty, and the other contains Jeem's scroll, the magical item you will looking for. Now you just need to figure out where to use it.
The submerged palace
If you've spoken to everyone that you've encountered, you may recall hearing about a palace that was lost and submerged in a lake. In fact, if you exit the Forest City, travel north one screen, and travel west three screens, you will arrive at a large lake with three pillars sticking out of the water. These pillars happen to be part of the roof of a palace. If you use Jeem's Scroll on this screen, the Lost Palace will rise out of the water, as shown in the screenshot to the right, and allow you access.
A new location means new, more dangerous enemies to face, and the Lost Palace is no exception. The Auto Attackers and Robo Warriors that greet you on the first floor are among the strongest enemies that you've faced so far. It is highly advisable that you equip any defensive items that can give you an edge, such as trading in the Helmet for the Japanese Helmet, and equipping the Cross of God. Even with these items, you will likely take damage from enemies as you fight your way through the palace. You may need to cast Cure quite frequently as you fight your way past the enemies.
Auto Attackers are stationary, but the missiles they fire do tremendous damage. Use what you learned by fighting the stationary plants in the beginning of the game, and attack the Auto Attackers from either the lower left or lower right where their attacks can reach you. Robo Warriors are better fought from behind than head on. They give over 100 experience points for each kill. This makes the Lost Palace an excellent place to grind to reach higher levels. Although it may take a while to accomplish, reaching or getting close to level 15 will help substantially. Additionally, you should seek to purchase every spell if you haven't already. Note that you may occasionally slow down as you fight Robo Warriors. This is typically because they rarely drop incredibly heavy Bronze Shields when defeated. Although they can be sold for around 3000 coins, they generally aren't worth trying to lug around.
As for the floor itself, your goal is to swing up the left side, cross the top from left to right, and then come back down to the right of the entrance in order to access the next floor. Note that standing too close to the weird statues like those found in the room in the upper left corner of floor will harm you. Along the way, there are two treasure chests that can be found. The first is tucked away in a corner below and to the right of the large room in the upper left corner. It contains Sun Oil, which is just a joke item that can be sold for around 300 coins. Far to the right side of the floor, found through the center pathway is Expensive Medicine.
The second floor is similar to the first. It also contains Auto Attackers, but the Robo Warriors are replaced by their more aggressive cousins, the Defensors. On top of being more aggressive, they can do a bit more damage. If you are a Cleric or Monk, and have access to the Invincibility spell, you may wish to consider using it here, as doing so may result in you spending less MP than not using it and constantly needing to cast Cure to keep yourself alive.
Throughout the floor, there are sets of laser beam barriers which significantly reduce your health if you try to pass through them. A row of them are found immediately to the left of where you arrive. Two more sets block access to the room in the upper left corner. However, if you travel up to the top, and over one screen to the left, you can begin traveling down a corridor that leads to the room in the lower left corner of the floor. Once you reach it, examine the wall in the upper left corner of the room, and you will find a mechanism to disable the laser beams.
Now you are free to travel to the room in the upper left corner of the floor. There, you will find some equipment hanging on a wall. If you walk over them, you will hear the sound which indicates that there's an item at your feet. If you bend down to examine any of these spots, you will discover a Space Suit. You will need to grab one of these before you leave, but you may wish to wait until after you explore the floor above. Space Suits are extremely heavy (as heavy as the Bronze Shields that the Robo Warriors would drop.) The good news is that they can double for armor. The bad news is that they're not quite as good as the Magic Armor you're probably wearing now, but the difference is minor.
When you're ready to head up to floor 3, the transporter is in the very middle of the floor.
The third floor is occupied by powerful robots. Tall Beacons and small Gubas roam the floor. Immediately below where you arrive is a treasure chest which contains a Bundle of Herbs. You will also find another chest in the room above where you arrive, but if you try to examine it, you won't actually find anything in it even though it appears to contain something.
You goal is to reach the room in the lower right corner. In order to do that, you need to first head right, and go to the room in the upper right corner. This room may look impassable, but you can actually walk between some of the rows to get beyond the machines that block the way. From there, you can walk all the way around the outside of the floor, counter-clockwise. Be careful exploring various alcoves or walls; some are trapped. Stepping next to certain walls may freeze you in place, and some may contain bombs. If you get frozen, you can try to wait until it wears off, or simply cast Move to escape.
When you make it around to the lower right room, gates will close behind you when you enter the chamber. You won't be able to escape until you fulfill your goal. Move up to the room above, and listen as you walk around. A sound will indicate where to search, and if you look in the right spot, you will turn a computer on. The computer's memory will reveal that a previous race escaped the planet and ventured into space. They excavated the ground to reach space, and columns of flame shot from the ground. If you check it again, you can read another entry about how their spaceship was disabled, and they are stranded in space. They ask for help and suggest looking for a crack in the earth, and that using a space compass can direct you to the ship. They also recommend a spacesuit, which you have seen one the second floor. They fear they are turning into monsters.
Once you read all this, some things will happen. The gate that kept you in will open and you can leave the room. You will also be able to examine the chest above the entrance to the third floor. It is trapped, so you must disable the trap, either by hand or by magic, in order to get the contents. This chest contains the Space Compass mentioned in the message. Before you leave this structure, be sure to visit the second floor and collect a Space Suit. This will weigh you down significantly. You'll need to sell off items like your shield and helmet and, if necessary, your armor. If you're holding Magic Armor, note that this armor is irreplaceable, although you will find even better armor eventually. Deposit money at the bank to further lighten your load so that you can walk normally.