Where is the controller for the shredder? I've found the manual but I don't see the actual controller anywhere in the room or in any containers in the lab.

It should be in your hero's inventory

Ahru gives it to you, if you talk him (it?) about this topic.

Yep Arhu has it and you have to trigger a convo with him about the machine/experiment and he will offer you the controller himself.

As I remember it Arhu says the controller is laying around here some where and I grabbed it off of his desk.

Arhu will give you the manual, you'll have to pick up the controller yourself (use ALT).

The controller allows you to simply destroy it without combat...
What's not to like?

How do you end this quest anyway. I had it on my list forever because I could never find those guys I saved. My quest log said that they went to see the Legion for help and that I should check on them, only I never could find them anywhere in town.

One of them got promoted to prison guard, he's now in the prison area and guards the treasure room. You'll find him in the cellar of Arhu's house.

!!! Man I swear I talked to everyone in town but never thought of going down into Arhu's basement.

Based on the only 'CLUE' we had, the log entry, I would have thought I'd find them at the clinic or outside talking to the officer drilling the troops. Dang it this game....