In Trade Town you can also pick up Twoedge, an awesome magic user. Return to Dryleaf and head north along the western coast until you come to Trade Town. Alathon is in the inn in the very north eastern part of town. Give Alathon the notes, and he will tell you that you need to find out about a device called Matrix Configuration . A set of 5 magical towers created by the Kzzir, which when activated form a barrier, that would prevent daemons from reinforcing their armies at Tormis. If you activate the barrier, Alathon may be able to help you shut the Daemonsgate. Alathon also hints that you need to find a mystical capital of the creators of Matrix Configuration - The Yelda.
Yelda promises to hold the answers to how the Matrix Configuration is operated. A proper way to search for Yelda is to return to Jornuli Point and inquire about Kzzir. That would yield information about one Roberto Zildar in Vorsai, who is an expert on the subject. You can skip that part, and move straight to Vorsai - a city north of Tormis, just west of the Sisters (mountain range north of Tormis).
Upon arriving in Vorsai, search out Roberto Zildar (if you want, he is in the central library) and inquire about Yelda. He will tell you that a book called Examination of Elder Races is in possession of Ludovic Gruber. He lives in the eastern part of the town. You can also pick up some rumours saying that Gruber is an experimenting daemonologist. When you go to Gruber's house you will find his diary, and a book called Codex Deamonicus which when read can bestow Spirit Lore on the reader. NOTE: If you examine this book, you will get information about Holtsweig's Staff. This is a subplot and can be skipped.
The Staff Subplot
Ask around about the owner of the staff (Moebius Holtsweig) and you shall be told that he was last seen at Sayville Town in the middle of the stumps (small hills that fill the centre of the continent). Go there, and inquire about him. You will be directed to his house, and therein you can pickup a rusty amulet and his diary. Read the diary and it will tell you that he ventured to a barrow, and never returned. Ask around for the location of the barrow, and you will be told its south east of town. Go there (on the map it looks like a clump of trees) and open one of the tombs (only one opens) with the rusty amulet.
Go in, and you will have to fight a ghost prince and his ghost cronies, including the ghost of Moebius. After the fight you can retrieve his staff, which can be used to banish deamons. Now, you have to go to Gruber's basement, and as you go towards east, you will encounter a Daemon Lord - Lab. He is very powerful, and unless you have a powerful weapon, such as an Elemental Sword, you have to successfuly run away on him. In the chambers beyond, you will find the book. Upon its examination you will find that it hints Cooltag's Rest to be the location of Yelda. Go there (Cooltag's Rest is in the middle of the stumps, slightly west). Once in Cooltag's you will find out from people that the mines are closed due to mysterious hauntings.
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