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This is the entrance from the first level of the dragon's eye.
2. Dead Body
At the end of this narrow passage you'll find a dead body that carries a Long Sword of Confusion and a Battle Axe +2, "Defender".
If you have spoken to Conlan the Blacksmith in Kuldahar, you will know that his son Sheemish was missing. He is hiding in a small cave here, and you can free him if you've cleared a path on the level above for him to escape. You can speak with Conlan and Sheemish again when you return to Kuldahar and you will receive their gratitude and a key allowing you access to Conlan's chest, containing Conlan's Hammer.
4. Mother Eugenia
This large room is filled with trolls and priests and priestesses of Talonite. Once you have fought them off, speak with Mother Eugenia. You will gain a large experience reward for freeing her and the villagers. She will offer to heal your party and watch over you as you rest.
This exit leads to the third level of the dragon's eye.