Dallis' Hammer has pretty low damage. It scales to your level?
No it doesn't.
Did you ever get the 2 hander to drop?
It doesn't drop every time. It was 4th time for me - I saved just before her health got to zero
when she turns into a dragon and flies away...
Also if you leave the camp she and her mates disappear and you journal is updated that you saw the Magister being killed so you can't cheat by sneaking out and getting some better weapons and then coming back.