The first part of this quest has to be done above ground. You need to find Irgwaim's Camp and then kill the guards and Irgwaim himself, who will drop the Moonstone. Now go into his camp and in the middle you will find a red chest containing some Rope. Now you need to give the Moonstone to Morgalson, The Toy Merchant, who will give you a toy bunny in return, take this and give it to Dax at The Pond. Dax will thank you for the gift, but tell you what he really wants is his sword back, and that Santa took it away from him.

To get poor Dax's sword back, go to The Bottomless Well and as you will see there's no way down, which is why we needed the rope. Put it on the branch hanging over the well, though get ready for a fight before climbing down; a group of rats that will probably surround you. It's best to use a spell such as Invisibility before going down, or Fear after you get down. Once you have killed the rats around the bottom of the rope, you will have to find your way through the maze for the stairs leading down to the next level.

When you find your way to level 26 you need to find the Statue of the Demon. This room contains 2 Thieves (such as Voxer in Arydl) and 4 nests, though this time they spawn spiders instead of wasps. The best way I've found to kill the thieves was to just stone curse them. As for the nests and spiders, my usual method of Invisibility and Fear.

After finishing off the thieves and nests, click on the statue and take the Ruby from inside. Remember Voxer in the land of Ardyl asking for a red ruby? Well this one would be quite appropriate, though it's probably quicker to finish these dungeons first, as there's more involved after you give him the ruby.

Now go down to level 28 (ignore the rest of level 27 for now) and find The Band's Lair. In here you will find a group of Usurpers (fake Santa's), and one of them has The Sword of Dax. Also in the lair is a red chest which contains The Cell Key, take this key back up to the Prison in level 27, kill the one guard and free the real Santa Claus. When you talk to Santa he will thank you for freeing him, but says he is still sad as he's missing a gift.

Now go back up to Serkesh and give Dax his sword back, and he will then give you his Mother's personal diary. Give this to Dax's Father at The Gariks' Farmstead, and he will reward you with the Crystal of Strength. This is all you really need to do if you just want to kill Draak, though there is a little more to the quest just for fun.

Take the Ruby you got in level 26 to Voxer in the land of Ardyl, though be ready for a fight when you get there (stone curse works well), as he doesn't seem too thankful. Kill him and he will drop the Master Key, not the weapon he promised.

Now go back to Serkesh and talk to Dax's Mother and get the Lucky Charm, and then go to the Abandoned House. Put the Lucky Charm on and click on the flour sacks you find in the house, and you will be lucky enough to find a present in there. Remember Santa Claus on level 28 saying he had a gift missing? Take this down to him and he will give you a Darkstone Expansion box. This isn't very useful, but it was a nice little bonus to the game. You can take it back to Takinis in the land of Ardyl and give it to him, and being very unthankful, he will turn into a Barbarian and attack you. When you kill him he will drop the expansion box again. I haven't found any further use for it (thanks to Max Feingold for pointing out that use for the box).

You can also use the Master Key to get into the back of The Toy Merchant's shop, and you will find A Rogues' Ring in there, though I'm not sure what it's used for.