At the end of this mission, the hero, who had been following Nicholas all the time, took a decent army (200+ dragons and everything else) and fled to the far border. For Faidaen, level 35, such an army posed no threat. He had 120 emerald dragons. Nicholas, however, was left with a purely symbolic army. Apparently, the script didn't allow him to flee from the last city.
Sweet Jane, I would send you a save file, but I'm playing version 3.0. Using a save file is simple - you replace your Campaign.sav with the one I send you. Of course, in this case, all the heroes will be upgraded to the liking of the sender of the save file.