Head west immediately after exiting the monastery. Just north-east of the Gnome Battlefield (just south of the Clock Tower), there is a perfect circle of grey stones. When inside the ring, a ladder will appear. Climb down the ladder. You will enter a large dungeon. Take the first path south. In the room at the end, you'll find the child's blanket on the table guarded by two level 14 thieves and a level 26 Head Thief. Bring the blanket back to Omad. He will be pleased because he can sleep now. Talk to Omad again. He is now better and wants to organise a party for a child's birthday.