I have been through all of the areas in ch 1 and found all of reagents, but I can't find the +1 short sword. I know the little bastard's around here somewhere!! Please help!

You can buy one from the weapons smith in the Docks district. ;)

Treasure is randomly spawned based on your proficiencies...if you have weapon focus, you'll receive a weapon of that focus when you kill the prison warden. [img]smile.gif[/img]

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You can get a +1 Short Sword from the Halfling at the Inn in the Beggers Quarter after you defeat Gulan. You need to speak to him before you defeat her though.
He will promise gold and a family heirloom if you find and solve the problems for the area.