Arn is given a sealed document by the Grand Master after leading the successful attack on Saladin granting his freedom. However the bad guy with long hair takes the top position - and rips up the document when Arn asks to leave. Arn must now follow his brother knights into battle, knowing the plan is doomed to failure and they are marching to their death.
Saladin attacks the thirsty and exhausted knights and they are all killed. Arn, beaten, looks up to see a Saracen standing over him with a sword.
Meanwhile, Cecilia has learned from Cecilia Blanka that her son has survived and was brought up by Birger Brosa - which gives her a new will to live.
Soon Cecilia Blanka is summoned from the nuns convent to be the next queen of their clan. It'll soon be Ceciilia's time to leave. The Mother Superior is seriously ill and calls Cecilia to her death bed - where she asks for forgiveness for giving her such a terrible time and taking away her baby out of jealousy. Cecilia replies that only God can forgive her. The old nun is irate and calls down curses on the woman.
Arn wakes in Damascus. Saladin has cared for him since the battle, in exchange for sparing his life before. He is allowed to leave for home.
The time has come for Cecilia to leave the convent - and she can finally meet her son, Magnus. An envoy arrives from the rival clan, and see that the new King is gravely ill. He also informs Cecilia of the Templar battle and that each knight was killed.
Cecilia decides to return to the convent - but just before she enters the doors, Arn returns with a group of Saracen bodyguards. They're back together again and rebuild their village - and train the farmers to form a little army.
The King dies - and the other clan (the red guys) sail over to attack the good guys (in blue, it's helpful to know who is who). Arn brings them all together, gives them a little pep talk, and then one of the archers shoots an arrow to test his range.
The enemy laugh at this, and the bad King summons the attack. When their cavalry reach the arrow marker, the blue archers let rip and take them all down. For some weird reason, the envoy shouts that it's a trap (what? In the history of the world that was probably the most obvious 'trap' that has ever been) but still the stupid red guys keep coming forward and most of them die from the falling arrows. Idiots. Finally the clans meet in the middle.
Arn is struck by the envoy, but cuts him in half. He then surges towards the King, who doesn't move, kills his men ... and then sends him away alone.
The good guys return home. Arn kisses Cecilia, but then falls to the ground -- and dies from his battle wound. Cecilia now returns to the convent again - they must be sick of seeing her by now.
In the closing credits we're told that they fought off the other nations, and Arn's actions helped unite the clans to form what is now Sweden.