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1. yes the dargon is in dark cave just west of drow city. You need to get the lite gem from the gnomes city in far west by beating a tanari. or just kill the little gnome.
spoiler****
if you want to go easy take the beholder place to get eyestalk. if you enter the illiad city you will be captured and its a pain to get out of city. illiads are most annoying enemy in game.
if you do go that route you can get some really cool mind circulets though (=
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