I can see number 2 happening. Fug will have to retreat at some point. The others in Zahard army are not mobilising most likely because they think the army at present can hold it off and win. But the moment the army is unable to the others in high command will swoop in to destroy them.
Khell may come in handy by teleporting them to a safe place while holding the others.
Might even be an interesting turn of event. Perhaps the reason why zahards army never lost is because apparently Zahard can see future and send appropriate force, this time if they incur a phyric victory or a loss and Fug leaders escape to safety it will not just deal a blow to the army but the near omnipotent status that Zahard holds via his future seeing ability. And in a poetic way khell will aid this scenario of zahards vision of Fug and Bam dying/defeated here being false just like till now he has been aiding in failing to predict future due to Zahard.