In the Dragon's Lair you will find the Magic Mirror—one of your three quest items. It is being protected by a large green Dragon who will be happy to cook you if you describe him while he sleeps. Despite his size and power, he is fairly easy to deal with. You can either douche him with water or sneak in invisibly to get the mirror. Find out more about that on each of the map pages.
The Dragon's Lair itself isn't open from the main cave entrance as it has been blocked by a large rock—put there by the Dragon. However, you can get into the lair by going down the well and entering behind the Dragon. If you douche the Dragon in water, he will open the blocked entrance and you can enter/exit though the cave from that point forward.