It's a big module, so it is possible that the module text gives guidance on the issue, but I couldn't find it. Do we know what the players should be selecting on their story awards and what I should be reporting?
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More broadly, a few of my players were really torn over their decision to stop Nulara and more specifically Lieutenant Stonefield. They were bemoaning the fact that they had to fight an NPC that has become one of their mainstays in the BALD adventures the whole time and were apologizing as they hit him.
I'm not sure what lies in store for future BALD modules, but my players would definitely love a chance for Stonefield to redeem himself. Even if that isn't in the playbook for sometime down the road, I'd recommend not dropping him from the story. Stonefield is a favorite for my players, and I imagine they're not the only group that favors him.
Without giving too much away, the way your party went, there is a option to continue. Problem is, that option isn't factored into the Exp your party would be awarded at the end of the mod and usually isn't run becouse of the limited time for the mod. (If I remember right, it's about 2 encounters in length, but is desribed in only one paragraph. Think it mostly sets up the situation for the PC and then tells GM to go to Encounter Z and proceed from there.)
You just need to go back and re-read the mod to find this info out. It took me a couple of read throughs to figure everything out as there's a lot that can happen.
The "Having it Both Ways" block doesn't at all answer the question of how to report the module if that segment doesn't get run, either.
I would probably go with "Escaped" in the situation you describe. Sorry that it isn't more clear; that's an oversight on my part.
That's actually what a couple of the players at this particular table said, too. So, that works. Thanks for the input, and nothing to be sorry about, Sean. I think the bigger concern, for players in this area, is that Lt. Stonefield gets a chance at redemption. This NPC is one of the most well-known and well-liked personalities in our local LFR gaming circles (it helps that I've used him in four MyRealms adventures).
I think other regions would benefit from a standard, always present NPC like Hart Stonefield. Just don't jerk him/them around too much.
Lt. Stonefield goes bad in BALD 1-6!?! Oh man, that is going to be a good story to run. My players have grown quite attached to that guy in the BALD modules. 
If the party decides to stop Nulara and the Lieutenant
from carrying out their plan, the NPCs will fight to
defend their cause. Since the enemy forces are much
stronger that the PCs, they need to engage in a skill
challenge while battling to be successful in this
encounter. All enemies use non-lethal damage during
this encounter, which means that PCs may fail, but will
not die. The encounter occurs on a normal street
without striking features. The read-aloud text assumes
that Nulara is alive. If she is dead, you adapt the text.
Nowhere in the module is this skill challenge that I can see, nor is there any indication of what happens when the skill challenge is completed successfully. How does it affect the disposition of the enemy forces if the PCs complete this skill challenge that doesn't exist?
Nowhere in the module is this skill challenge that I can see, nor is there any indication of what happens when the skill challenge is completed successfully. How does it affect the disposition of the enemy forces if the PCs complete this skill challenge that doesn't exist?
I went back and checked my notes from when I edited this adventure, and the reference to a mid-combat skill challenge in that encounter should have been removed. My bad for not removing it. There is no skill challenge if the PCs decide to fight Nulara and her allies; the PCs either defeat the NPCs in a straight-up fight, or they don't.