First, where do you get a chance to pick up the spell improved invisibility? I have just cleared the Hook Horror caves/Duergar stronghold in Ch 4 and I have yet to come across this spell. I've been specifically looking for it , maybe I missed it somewhere on sale...does anyone know?

Second, my Paladin wants to set the slaves free from the Duergar instead of just doing their bidding to clear out Black Raven monastery. Is there anything the dwarves give you, for completing their quests, that's something you really want to have?

I took a peak at the item list and the only thing on this quest list that caught my eye was the armor of warding (magic resistance). I really enjoyed wiping the floor with those evil dwarves, is it worth taking back just for their quest goodies? (Sir Victrian shudders at the thought).

http://www.sorcerers.net/Games/IWD2/index_tips.htm
look for this faq titled "Icewind Dale II Wizard Scroll Locations". This should slove your question 1. Generally, spell scrolls comes slower than wizard level up.

Sorry to tell you, you paladin cannot set free the slaves. Those slaves will fight hand in hand with their masters.

As an evil alternative, you can agree to do their quest first, clear out the black raven monastery, come back and claim the rewards and kill them together.