When you first enter the Militia Headquarters in Saradush, you witness an impromptu trial where Mateo is sentenced to death for treason on the testimony of Countess Santele. After the trial, speak to Captain Samand to learn that he is rather doubtful about the case, and that his initial prime suspect was a man named Kiser Jhaeri. Obtain the Captain's permission to speak to Mateo in his cell.
First, take the stairs down at 2 and tell the guard that you have the Captain's permission to speak to Mateo. The guard opens the door to the cells.
While here, don't forget to loot the table at 3 and the wall container at 4. ;-)
Mateo is in the cell at 5. Speak to him to learn that he also suspects Kiser Jhaeri of being the traitor. He believes the Countess gave false testimony under duress. Her son Ardic, a good friend of Mateo, has gone missing; maybe you should speak to the Countess about this?
Since it's the best idea you've got, go speak to the Countess. The entrance to her house is at 5 in Saradush.
The Countess willingly enough tells you that she gave false testimony because Kiser Jhaeri has abducted her son Ardic.
Now go out to Saradush again and find Kiser Jhaeri's home at 6. Enter and speak to Kiser.
Kiser readily admits having abducted Ardic but claims it was to protect himself from being falsely accused of treason. He fingers a wizard named Errard as the true culprit. Kiser asks you to kill Errard for him. Accept, for now!
If you are Evil, Kiser recognizes you as such and admits to being the traitor. He suggests that you could kill the Countess instead. If you follow this path, Jaheira will leave your party permanently.
Go out into Saradush again. Errard can be found at 3, commanding the defenses of the city.
If you kill Errard, the entire city militia turns hostile. So I suggest you don't.
Instead, speak to him and tell him that Kiser sent you to kill him but that you're not going to do it. Tell him instead that Kiser has admitted that he abducted Ardic.
Errard casts a divination spell that shows Ardic is in Kiser Jhaeri's home. Hmmm...
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