This quest triggers when you first discover Frostmere Crypt, which is south of Dawnstar (quite a ways south... Frostmere Crypt is JUST NORTH of "The Lord" Standing Stone though, so you should find it easy). Once you are there you'll see some bandits fighting each other. A woman named Eisa will win and will tell you that she was part of the bandit group, but someone stole the bosses sword and she was blamed. This quest will now be active.
Our objectives are to find the stolen sword and optionally to learn more about the theft in Frostmere Crypt. Huh, I don't know WHY we'd do this, but oh well, it's a quest. Head inside Frostmere Crypt. As you would expect, there will be bandits here. There are three in this first area, and two of them are talking about the theft. Head onwards and out onto the walkway (sneak here) and you'll hear talking below with a new objective being added: Follow Kyr and Ra'jirr into the tunnels.
Head forwards. There's a bandit on the left with a locked room (unlock it for some goodies). Down the hallway keep your eyes open for a SNEAK SKILLBOOK called "The Red Kitchen Reader". Go into the next room on the left and read the book on the table (Kyr's Journal) for some insight into what's going on. Interesting. Head out and take the next left room to read Eisa's Journal and Ra'jirr's Note. You should fully understand what's going on by now!
Head out and kill the two bandits at the table below, then open the door and kill two more bandits (who may be sleeping). Follow this path at the end to kill one more bandit and hit the lever to open the way forward. Fight your way past four more bandits to find the door leading to Frostmere Depthes and enter.
Once inside you'll see Kyr dying. Listen to his final words. It's amazing that this forest is inside the mountain, no!? Head forwards and you'll see that Ra'jirr was too late. You'll now have to banish the Pale Lady. The Pale Lady summons wisps to attack you and just plain acts like a Wisp Mother in general with one difference: when she's about halfway dead she'll split into THREE copies, but two are shades (the real one should be glowing way more than the shades). Ignore the wisps and take her out to complete this quest.
We're not done yet though. You can loot Ra'jirr to find the Pale Sword. You can also put it back on its stand on the altar if you wish (I DON'T KNOW if keeping it is "bad", but since you already killed the Pale Lady I suspect it'd be ok). There is also a hidden MASTER chest to the left, as well as a chest and a DRAGON WALL (STATUE - ICE FORM) to the right. Very nice rewards, no? You can use the nearby door to have a shortcut to the exit. Note that there IS a chest in the water where the ramp goes up to the locked door. Quest complete.