My favorite town among all others because of many reasons, most of them are listed below; but all considered, I think that Dungeon is one of the best and toughest town in the game.
Can't be blinded as they have no eyes. In great numbers they are strong foot 1st level unit.
They have wonderful ability to attack and return back leaving an enemy unit without any chance for retaliation. In defending town against a siege this is extremely useful as Harpy Hags can raid enemy creatures outside walls without any reprimand and return happily back behind the town walls.
Extremely good shooters and have high defense strength, which enables them to protect themselves in hand-to-hand fight.
Though they have the lowest number of shots among all shooting units, they however, have one wonderful ability to stone enemy units in hand-to-hand fight.
My opinion is that they are the most reliable, trustworthy and the strongest 5th level creatures and even better than some of the 6th level creatures of the game. They always have excellent morale and therefore can more often than not attack twice per turn, especially if your hero has high level in Leadership.
Powerul creatures and can paralyze. With the right tactics thay can render you invaluable service with their paralyzing ability. I have had sometimes the situation when they paralyze four (!) times in a row. Plus don't forget that they are flying creatures and every flyer in the army is an advantage.
My favorite beloved creatures that are the most powerful among all other town creatures of Heroes III, from my point of view, of course, but it's hard for me to be absolutely objective in this case, isn't it? Well, they are simply magnificent and immune to all magic.
Unique characteristics of the town
The Dungeon town has a lot of advantages. Here they are:
I think it is one of the biggest bonuses of Dungeon. It doubles your knowledge and from my point of view as the magic user it is extremely important.
Academy of Battle Scholars
Will give any visiting hero +1000 experience, which sometime is exactly what is necessary for your hero to reach the next level.
5 levels of Mage Guild. High probability of getting such invaluable spells as: Town Portal and Resurrection that are most needed in the game.
Very good little shop with many opportunities for your visiting hero. You can buy artifacts directly in the town or trade useless artifacts for money and resources.
Portal of Summoning
Very interesting thing that exists only in Dungeon. It gives you a possibility to recruit extra cretaures in the town from the external flagged dwellings. With the right tactics you can have four Dragons instead of two every week, and a double Dragon growth is a very serious advantage, isn't it?
Will work as a sulfur mine and give +1 sulfur every day.
The Dungeon graal is Guardian of Earth (very nice guy!) and apart from the usual 5000 gold per day and +50% of all creatures growth it gives your defending town hero +15 spell power that with double knowledge from Mana Vortex significantly boosts the magical abilities of the defending hero. For me, since I do prefer Magic above Might, this is the greatest Graal in all of Heroes III.
Very often Dungeon is underground. That fact alone is a serious obstacle for your opponents in finding your hometown.
That is Dungeon for you, the hometown of powerful Warlocks and fierce Overlords, loyal Minotaurs and magnificent ancient Black Dragons. Now do you understand why I like it so much?