I've had the same problem as the OP. I've had to retry this battle 5 or 6 times before finally getting the correct parties into combat (not "aggroing" the gnomes and /or all of the duergar and the correct dialogs to work. Then after getting a victory, I cannot loot Nere's head !!! <grrrrr> He actually died within the doorway to the rubble. I even thought about taking the whole body, but that wasn't an option either.
Seems like the gnomes should run for cover into the hallway to the right under the balcony and not randomly wander around a battlefield.
I finally gave up on completing the quest from Spraw and just moved on.
