I managed to beat him at low level by using summoned monsters, etc to distract him by attacking from the front whilst my fighters surrounded him around the rear (ooh err!) and hacked away. Jaheira cast insect plague after my mages had used lower resistance, malison, doom, breach etc and then I found attacking spells woulsd work also. Don't attack the mage and dragon together, talk to the dragon first and the mage will teleport upstairs so that you can fight them individually.
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