So, my character Eldaril was having dinner in Bravil when he heard about a Mages Guild member in great distress. Rumour had it that her friend had disappeared and she was willing to offer a reward for anybody who could help. Naturally he had to help, so he visited her and it turned out the rumours were true - her friend had disappeared and she was offering a reward if anyone could get him back. Wanting to help, and gain the promised reward, Eldaril embarked on a dangerous quest into Henantier's mind to release him, and gain the promised reward. After successfully freeing Henantier from his nightmare, Henantier graciously gave Eldaril a spell tome as thanks, and Eldaril turned to Kud-Ei to receive the promised reward. And what does she say?

"Fancy joining the Mages Guild?"

Apparently Argonians find it socially acceptable to offer rewards on other people's behalf. You learn something new every day.

That's quite a brilliant little situation you found there...I can appreciate the frustration as that quest is really dangerous and takes a fair amount of time too.

If it is any help, I completed that quest a while ago - the reward IS from Henatier, not from Kud-Ei.

Edit: http://uesp.net/wiki/Oblivion:Through_A_Nightmare,_Darkly

Yep, nothing from Kud-Ei. Misleading advertising, you might say.