If you head to the exit passage right away (look for a blue light near the top of the cavern), where you will automatically transform back into human form, and can then save and not have to redo the cutscene if you die. From there you can jump back into the cavern, attack and retreat repeatedly. While healing in human form, you can enabling target lock (on the Xbox hold the left trigger down); I was able to kill several demons with my bow that way, after they flew up to the passage (though if they don't stay close very long they can easily fly out of range).
Being a higher level helps a bit. Lowering the difficulty setting might help, though not a lot in this case.
From another topic:
Zagan himself wasn't terribly difficult to defeat [at level 25], but the rest of the opponents in there were a pain. It would be easy with more space, but if you loose track of where you are going or bump into something and stop moving, that is likely to prove fatal. I tried repeatedly heading to the exit cave to transform back to human, but returning for hit and run attacks wasn't doing damage fast enough (by the time I finished the transformation animation there could be 2 or 3 opponents shooting at me, and maybe 1 or 2 casting Dragon Sphere). I tried making a couple runs at the nest tower, but the first time I stayed too long finishing it off with Dragon Breath, and died shortly after it did. The second run I broke away sooner, but got caught up on something and couldn't move for a second, so I died.
I reloaded my save before triggering the cutscene with Zagan, and will go back later to finish everyone off.
[At level 35] it was easier, but still a bit of a pain. I used pretty much the same technique as before, concentrating on getting the number of flying opponents down first, to allow a run at a nest. Apparently clearing the fortresses was good practice, as I rarely got hung up on obstructions, etc. I still had a bit of a problem trying to target specific opponents, where pausing the using the right stick could, for example, cycle between demons above me, when I was flying directly towards a nest (and was a lot closer to the nest than the demons). In these cases unpausing and getting a little closer would generally allow me to target what I wanted, though the delay could help my opponents.
For the opponents in Zagan's cave, I seemed to make faster progress getting a Firesphere off and then returning to the exit passage right away, healing when necessary (usually the case, since often there was an attack directed at me before I finished transforming), and then jumping back into the cavern. Trying to fly around in such a small space and get a few attacks in was more trouble than help (though I didn't do much of that when I went back at the higher level; just attacks of opportunity returning from going after the nests).
