No it isnīt 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.
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