The dwarven council member takes the items that you need to show the king. <img src="/ubbthreads/images/graemlins/suspicion.gif" alt="" /> You can download another axe and letter, though;
Lost Items - guide and directory of inventory files

Even if you do not get the dragon armour, there are other armour potentially as good (silver/larian armour), and towards the end of the game you should be powerful enough that a lower quality armour shouldn't make any difference.


"what do the numbers in parentheses on the sword mean as opposed to when it says +1 to a skill?"

If it is +1, it adds a level to the specified skill in your own skill set.
A number in brackets means it is a separate / unique passive skill. Frost on a weapon ignores the target's resistance, where Freeze does not. Other than that, most weapon skills are similar to the corresponding ones in your own skill list. Stun(3) on a sword with the warrior's Stun skill learned would give you two chances to apply the stun effect per hit.