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I posted how I beat this level on gamefaqs. Basically, I went with elves and dwarves. Two elvish guilds, healer guild, drawf guild and rogues (mainly for the tax thing). Elves are great because they respond to flags (which you will need when the revolution first starts) and dwarves for the towers and because the dwarves will stay close to the castle and defend. The rogues were handy with their stun. Make sure you get the trading post just to the right of your castle. Once you survive the first wave, it is much easier to win. I put three dwarf towers to the north of the castle and one to the right, opposite the one the 'bad' kindgom has. The elves are also good because they will carry around 10 healing potions and use them, which gives you time to find and save them with the healing spell. They also gang up on flagged enemies. Pretty much 3 upgraded elves can take down just about anything in this game. I did find the renegade ranger, or whatever he is, the day before the revolution started (I believe if you find him earlier, it triggers the revolution). I also tried to clear out as many dens as possible. It helped level up my heroes and also made it easier to just focus on the enemy heroes when they attacked. Hope that helps. I posted a better description on gamefaqs, if you want to look. I was also having problems with this level. Good luck. :)
 
Oh boy I remember that one. I had to restart several times before I got it right, but I don't exactly remember what I did. I think I made a dwarf army with lots of healers. I think I also had rouges as well. The dwarves do wonders in taking out those buildings, and I had a 4 man pwnage squad of rouges (one was like, a lvl 23 lord). Dwarves stun and rouges stun -- it's very useful to take out those heroes before they run away. Your hero setup can really make the difference between victory and defeat in these missions. I had most of my heroes defending key positions of my base, mostly the north and east because thats where the enemy attacks from. I would only set attack bounties on one area at a time and made the bounties large enough so that one group responds.

Do not reveal/destroy the range hut early! Wait as long as possible until the revolution starts. Good luck! You will need it as there are far greater challenges ahead.