The QUEST component to the Cloak of Balduran, this is really spoiler material.
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In the Northwest section of the city, in a house by itself, there is a mage's house. If you have walked into this house, you'll remember, because there are helmed horrors and invisible stalkers ready to kick your adventurer butt. If you kill all of them and make it to the back room, you can talk to the mage. He will give you some flesh to stone scrolls and tell you about the house.
Go to the house (I believe it's the central part of the city, across from the tents and stuff, but the mage should give you some idea--read your journal after talking to him), use the scrolls on the statues. If you kill them after releasing them, you get a note off the leader giving you some hints about where the helm is (it is at the Helm and Cloak Inn in the Northwest part of the city, second floor, behind a trapped painting) and saying something about the person he gave the cloak to and where she is. Not sure if the note spells this information out clearly or not, but she is the named concubine I mentioned in the post above. If you choose not to the kill the statue men and be polite with their leader, he will give you more or less the same information in dialog and then they leave. Personally, I prefer killing, but that's just me
Now you have two more things to do on this quest if you choose....
one is to take the Helm of Balduran back to that horrid little mage's house and give it to him. He will summon more invis stalkers and helmed horrors as a reward, what a jerk. Plus he will run away with the helmet. This is bad, therefore I prefer killing the mage too, are we seeing a pattern here? Note: You CAN give the helm to the mage, let him summon his friends and THEN kill him, but you have to be quick and you're getting pounded on by the horrors and stalkers in the interim. Save before trying this, or you might lose the helmet for good AND get killed by the summoned monsters. The only reason to do this is if you wanted the experience from the quest AND the horrors/stalkers, and since you are going to get to the experience cap pretty easily anyway, I wouldn't frustrate myself.
Two, go to the "den of iniquity" (for the life of me I can't remember the name of the place below the Blushing Mermaid, I keep wanting to say Underdark, but I think I've been playing BGII too much
) If you were nice to the statue men, you should just be able to talk her into giving you the cloak. You might be able to talk her into it even if you killed the statue men as long as you talked to them before the slaughter, but I haven't ever cared enough to confirm this, although this runthrough I'll try just 'cause it's something I haven't done in my jillions of times playing this game. If you weren't nice to the statue men or if you didn't talk to them at all, you can pickpocket it anyway.
Whew, talking WAAAY too much today