My quest marker seems to be either pointing in the Thalmar embassy or around that area. Though i've heard reports of it being in Bleak Falls Barrow/Lost Echo caves. Is it a random spawn when you accept the quest?

Have a problem with that same quest actually... I found the book prior to actually doing the quest, now it wont recognize I have it in my inventory. Of course I cant drop it because ITS A FREAKING QUEST ITEM! so annoying... I remember picking mine up at the Thalmar embassy in a chest...

That's where it is pointing me! But the gate is locked and needs a key, is there another way in or is there a prequest to get the key?

You have to do the Main Quest to unlock it, I shall say no more unless you want spoilers