What I think doesn't work at the moment for the main fight is that the performance of the PCs in that combat is utterly irrelevant to their ultimate success. Basically, giving the fight of your life and winning through both tactical genius and a string of fortunate dice rolls provides no better result than kneeling down, baring your neck and saying "plant your axe here, please." Thus, the entire combat is literally a waste of time.
Personally, I'd consider raising the stakes a little. Have each character confront two mirror images - one obviously better equipped than he is, the other obviously with inferior equipment. Whichever image he approaches is the one that appears when the mirror fades.
Whenever a character dies, the mirror-duplicate who survives finds himself equipped with the dead character's equipment instead of his own. So if the player chooses to face the beefier opponent and wins, his equipment improves, whilst his equipment is downgraded if he defeats the ill-equipped version. Whichever version he faces, if he is the one defeated then he ends up keeping his own equipment.
If you make sure the players know the rules beforehand, this will likely result in them facing off against their tougher duplicates. Most of them will be defeated, and neither gain nor lose, whilst a couple will win, and get an upgrade. Only those whose characters lack the courage to face a greater opponent will face a potential downgrade.