I am getting very frustrated. Have spent several hours trying to defeat the enemies upstairs and keep getting killed. I have tried every spell that I have and I am about ready to start pulling my hair out. HELP!!!

What level are you? This is a very tough battle for low level players. I had to come back to it several times and wait until I was a highter level. My suggestions are to clog the room's doorway with summoned critters then start casting offensive spells and using lots of ranged weapons.

Make sure you take out the mage and Pooky first. Like Turovee said, summon, summon, summon (well....you can only have 5 at a time). The preferable creature are Woodland beings (nymph), and fire elementals, you can have both of these spells if Jaheria is in your party. Make sure a couple of your summoned monsters are dealing with the thief, so he cannot backstab your party members. Send the rest of the summoned monsters to deal with the drawf. If you are lucky, you can charm the barbarian and/or drawf from the nymph. Should you have a cleric in your party and can cast holy smite, provided you party is non-evil aligned, that can also be great help. Good luck.

I am a Level 8. Can I pass this part up and go to the next level, then come back? Isn't this the end of this level? And where do I go to get to the next level?

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No, this quest have nothing to do with which chapter you are in during the game, like many sub(side)quests this is not time restricted/specific. You can always wait till a couple of chapters later when your party is tougher then tackle them again.

No it isn´t the end of the level. You can pass it for now if you wish. A good strategy is to summon some creatures befor you enter a conversation and have them clog the door way, cast a cloud kill perhaps over the mage and that flying batthingie and pump in alot of arrows and use a cleric (if available) to make some party benefit spells and use as much as you can, there are some goodies and some XP in this fight but not worth dying for, so try to rest before and come back either fully prepaired or later when you have gained some levels.

What characters do you play with? It should be possible to beat them no matter what level.

If your only 8th level, wait until your...maybe tenth. Then...Cloudkill! Head downstairs, a couple follow, gang up and whack'em, wait for cloudkill to expire, go up and finish things off. Fair? No, but its not Marquis of Queensbury rules!

Nope, rather Marquis De Sade rules.. But there is no runner up prize either LOL :-P

Heh, yes there are always "cheaty" ways like using cloudkill to solve all your problems.