"Long ago, I met a Werewolf named Vardus. He was a good man... er, wolf... er, you know what I mean. He wasn't violent and he didn't prey on people. Recently, I heard he had taken up residence in the Caverns here in this dimension. He might be able to give us some more information about what happened here, or he may have fallen victim to the Great Evil's energy weapon. See if you can find him, but if his soul is lost, you should exterminate him, for his sake."
Leave Nichol's house and walk up the steps to the Caverns. Follow your compass to Vardus' hideout, on the opposite end of the Caverns. Unfortunately, Vardus has lost his soul, but will only attack you as soon as you engage him. The quest will complete after you kill him. When you have done so, return to /warp chapter2.