1. The cave is not that far away, go past the magic range just opposite his castle and turn right where some evil beholders are guarding the entrance to a cave.
2. No downsides.
3. No downsides, just an "upside", in that you complete a quest and get an artifact. In my last game I got the -30% leadership for griffins artifact. Too bad I don't think too highly of this unit. Not that it's bad per se, just meh.
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