I have the same issue as above. I did not realize you could "talk your way" trough this one, so when presented with the option i chose to take party in and after a short dialogue we proceeded to kill everyone in the room, trouble is the quest didn't update and i did not realize there was an issue until a few hours later. Of course I don't have a save file that goes back to before that. So at this point i am totally screwed unless someone has a work around.