I had a funny thing happen with this mission. So, I captured all the Castles, gathered armies of about 60-70 dragons and other units in them, and captured the last Castle where Nicholas was. He revived near another Castle, but instead of attacking, he started running around the map. I checked his army in the tavern... and he had 40 dragons and other troops. I lured him near a Castle and defeated him. He revived again. I defeated him about 6 times. Then he appeared in the Dungeon and ran towards the teleport that leads to the center of the map. I thought, let him run. He'll attack my central Castle where my main hero is, and Nicholas will have 4000 (4k) dragons. In the end, he defeated me, and only then did I realize that I needed to get Phoenixes to complete the mission. Luckily, I had a save before I attacked Nicholas for the first time.
Funny:D
And I didn't even capture the Castles on the western peninsula... after about five turns (after he appeared from the teleport), I found Nick and attacked... I quickly defeated almost all of his army, but then I got a message saying that Nick had escaped... I was upset, I clicked OK... and then I got a message saying "Mission completed":D
Because I had Phoenixes:D