About the surges. If Khoryat gets one surge and the target has no figure within 4 spaces. Can the overlord use fire breath anyways targeting empty spaces or do they have to have a target, and therefore must spend the surges on +3 damage?

plus...does it have the shadow ability?

this quest's special rules are very poorly written.

As much as I know the OL chooses how the surges are spent, but must spend all surges.

What is unclear though is wether or not the OL can use OL cards on Khoryat (such as rerolling defensive dies, after he rolled many shields against his own attacks, or adding +3 damage for a surge with a card and so on) and if he has shadow ability or not, because he is treated as a shadow dragon (or if this just means he is a 2x3 space-monster).

I don't really have a problem with how these quest rules are written. To answer your questions:

1) The OL controls Khorayt, even when Khorayt is attacking Sir Alric. When Khorayt attacks, the OL may spend surges on either +3 damge, Fire Breath, both, or neither. Nowhere in the rules is he required to spend as many surges as possible. He can choose to spend a surge on Fire Breath even if the other 3 spaces wouldn't hit anything.

2) Khorayt's stats/abilities are listed in the box in the quest guide. If it's not in that box, he doesn't have it (that is, no shadow, no melee attack, etc.)

3) Under setup, it is stated that Khorayt does not follow normal rules for monsters. Therefore, I would say you can't play OL cards on him like he was a normal monster.

1) I got that from this FAQ http://boardgamegeek.com/wiki/page/Descent_Second_Edition_Unofficial_FAQ#toc70 where questions were answerd by one of Descent's designers:

Q: In the Desecrated Tomb Encounter 2, the quest guide is quite clear on how Khorayt moves and who he attacks, but who gets to determine how he will spend surges (if there is a choice) and how flame breath would travel?

A: The overlord has control over anything unspecified in the quest. However, he must spend all surges rolled, and, if using Fire Breath, must attack in a manner that will affect the figure carrying the Dawnblade (if possible). Otherwise, any other choices on how it functions is up to the overlord to decide.

3) While this is kind of logical for OL-cards that specifically say you have to play them on monsters, it isn't so logical for the cards that say such things as: "After rolling dice, you may reroll one die" or "Add: surge: +3 damage to the attack".

and while there is no real rule-conflict, this whole thing seems so wrong thematically, yet so important for the quest-outcome:

Thematically the OL tries to kill his own monster with his lieutenant, while additionally his own monster is activated during the heroes turn, yet the OL rolls all the dice and so on. Then he can spend the surges to his own liking: The dragon that tries to kill the dawnblade-carrier suddenly doesn't really try anymore, as he uses only fire-breath when attacking the lieutenant and thus damaging heroes that are far away and don't even seem to be anyone of his interest. If the heroes however have the danwblade he suddenly only damages them a ton (up to +6 damage), although they can't even do anything to him and completely loses interest in the one figure that nearly killed him before.

Then there are the OL cards: The dragon made a really good attack-roll on the lieutenant? Better reroll the dice

The dragon made a really good defense-roll?, better reroll the dice. It just seems wrong to use these cards to go for worse rolls or even trying and hoping to roll bad results, although perfectly legal.

I played this quest before reading the FAQ and we thaught it made much more sense to let the party play the dragon, who he opposes. It made perfect sense to us, because why else would the Dragon be activated in the hero's turn (at the end of hero's turn) and not at the start of OL turn). Meaning: If he targets OL figures, the heroes roll the dice and decide how to spend the surges, if he targets the heroes, OL rolls the dice, if he gets attacked by OL the heroes roll the defence dice. We also played that OL cards could not be used, because it felt strange to use them on a quest-objective. It was an extremely close game, we couldn't finish that session. When I noticed all the mistakes, it was clear that the OL won the quest easily.

The thing is I liked this encounter very much, because it had a nice dynamique. However with the correct rules it seems to be a very strange quest, where rerolls are used to get worse results, attacks are modified to do the least damage possible and so on.

I didn't see the unofficial ruling about the surges- I'm curious about where that came from- I don't know of may places in the quests where all surges must be spent (with the exception of "Uncontrolled Power,") and it's definitely not in the rules on that page in the quest guide. It makes sense that a fire breath surge must be spent if that would allow the dragon to attack the dawnblade holder. Otherwise, it seems strange to me- though it's true that the OL could choose to make attacks against Alric weaker if he didn't want to spend surges.

OL cards also allow for that kind of manipulation (as you pointed out,) and so that's another thing to consider. Might be worth asking FFG directly.