That's an easy one... when you appear just in front of Kerghan's castle, instead of crossing the bridge, go to the near teleport. Just teleport until you appear in a landmass without any enemies, then go south and you'll find earth downstairs, and down an entrance to a cave... there're lots of lizards, just keep your way left and then up, and you'll find Kryggird's Falchion in an Altar guarded by an Araya Slaver and some slaves. PS: Any-one knows who the hell was Kryggird!? To have tremedous sword! You can return the Bane without it and nothing happens, but if he had the Falchion... beware!
I've been thinking about this one: Sure, it's very impressive that the regenerative shells of the uberpowerful mages can only be destroyed by ONE item of technology and ONE magical sword in the whole of Arcanum and the next world. BUT When you're exiled in the void, the only things that exist there are teleporters, wrecked buildings, and said magical sword. It was really only a matter of time before somebody stumbled on it. It's not a comment on game design or plot, just a little whimsy.