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What has pickpocketing got to do with curing the plague? I noticed there are only two cure potions in Dr Elrath's cellar, yet three people are ill. Do I pickpocket the third one from somebody?

That's right. You pickpocket it form one of the plague victims you've given a cure potion to. <img src="/ubbthreads/images/graemlins/smile.gif" alt="" /> Nasty, but true.