@Lordwiki PM'd me asking how I defeated the knight that stole the Demon baby.
I thought I'd post here how I did it so that everyone struggling with this battle can benefit.
I've attached our starting armies so that you can see what I was up against and compare it to your situation.
This was a tough fight!
As you can see I only had 5 Scoffer Imps, 2 Blood Priestess, 1 Demon, 2 Demonesses, and 9 Imps vs 12 Guardsmen, 73 Peasants, 18 Bowmen, 72 Peasants, and 145 Peasants. I only had 15 Mana and Fire Arrow for my spell and so I cast it 3 times (once each turn) and that was it for that. I was level 2 and had Power of Spirit and Diversion at Level 1 in the Paladin skill tree for 1 trap.
The key for me, was to prevent the Bowmen from using their Cold Arrow attack because once they do you won't be able to do no loss.
You can use the Imps and Scoffer Imps to work on whittling down the Peasant stacks with their Fireball.
The Demonesses need to move one hex forward to protect your Imps as well as block the Bowmen from escaping and then swap the Demon troop with the Bowmen. The Blood Priestesses also need to move one hex forward for the same reason and then you can use their Bleeding skill on a stack of your choosing. One note about effects like Bleeding: it does more damage the more units there are in an enemy stack. Keep that in mind for selecting a stack to use it on.
You can use the Demon's Run ability to run away from the big stacks, you can use their Bloody Pentagram to increase the morale of your troops, and summon a stack that is going to be used to keep those units away from your troops. Use them to take advantage of that one trap on the battlefield as well.
With this in mind, you should have no trouble whittling down the Bowmen until your Demonesses can Charm them. You should then be able to use the Bowmen's Cold and Fire Arrow abilities on the enemy while marching the Bowmen forward so that they can be used as a meat shield to protect your Imps and female warriors if needed.
Depending on how long you can keep your summoned troop alive, use them to be the first attack and let your Demons attack without the troop being able to retaliate. This will make those stacks more manageable. Your Demons are going to have to absorb a lot of damage in the end, but try to do this until your summoned troop is killed.
Don't forget about the Scoffer Imps' Sneer ability - it can be instrumental with protecting your Demon troop from an inopportune strike. Use the order of movement of the enemies to block each other so that it takes them longer to march down towards your troops / prevents them from attacking your Demon and his summon.
Position your Imps so that their strike and return ability allows them to attack the enemies without the enemy being able to move forward and hit them. That no retaliation is key for whittling down tough stacks.
Remember that the AI attempts to move as close as possible to your troops while still being able to attack. They will never move without attacking or using a special ability (unless something prevents them) so you can use your Demon and summoned troop to prevent them from moving forward towards your softer troops (and you can use them to run further away for another Demoness swap down the road).
You may need to have your Demon troop absorb a ton of damage where they are down to only about 20 to 30 health, but you can also let your Demonesses (and Cerberi if you use them) absorb some damage, too.
Lastly, don't forget about your recharging abilities as you may need to use swap to move an enemy far away and another summon from your Demon troop later will really be key.
This is essentially how I did all the tough early battles, by the way, including this one, the big spider stack in the Catacombs (I also attached a picture for that battle), the 3 Shelter fights, and the 3 Whitehill fights (I used Cerberi instead of Blood Priestesses for most of the other battles).
You can see that you are maximizing your unit abilities, using traps, and trying to keep the most damaging enemies away from your soft troops. Your high hitpoint units can be used to absorb damage so that they only have 20 to 30 left. Lastly, you need persistence - I kept trying and you can get a feel for the tipping point of a battle.
Good luck if you're struggling with these early battles and keep these strategies in mind!
/C\/C\