To pass the test, you have to defeat him. However, this is not easy because he will continuously flee from you (in fact, he teleports himself away).
You can find him in the first room, which is filled with poison. However, the player can avoid the poison by walking the bloody path strewn with bodies and blood trails. Anyway, beware of the skeletons. Eventually, the walls will start shooting fireballs, so be careful.
When you are near the middle of the room you'll see Jagon, who starts shooting at you. You'll have to shoot him in order to make him flee, or continue your way until you can get him in close combat. After the confrontation he will flee and another door will open. Chests in this room don't seem to contain anything of significant importance.
You'll enter a new room where you'll be attacked by skeletons. You'll also find a chest, but to access to it you'll have to find the key located on the Dragon's head in this room (it's not too hard to see - look for the sparkles, just next to the wood, but only shows up if you Mindread Ragnar first). You'll find Jagon again, but he will teleport away... again.
Make your way through the lava chamber by wading through the river. Do note, however, that there are chests along the fiery banks and the highest-most chest holds a part of the Wild Dwellers Set (Dragon Knight Saga). The Bandit Cave, the final test, is also where Jagon will meet his doom, hopefully.
After Jagon's demise the player may then enter the portal and meet the necromancer Lord Laiken of the Battle Tower. No matter what you say he will push you back through the portal and will collapse some stones over it.
The quest will then be complete and you may now choose your reward. To return to the Bandit's Camp, take a small green portal which is found to the left of the big collapsed portal. The Temple, however, cannot be re-entered, eliminating any chance to claim any items that the player initially failed to collect.
The quest reward is a choice of either 1500 exp or 240 gold.