It takes one year to train to the next level. Presumably part of the training fee is for room and board during that year. :) or something like that.

Holy crap, a whole year to train?! Then again, given the paltry (starting) cost of something like 50 gold to go from Level 1 to Level 2, I guess that's not a bad deal. Still, since each of the characters train individually, and the way the XP is staggered (1/2 the classes raise every 1000, the other half every 1500, or something like that), shouldn't it take 3 years for the first 3 to train while each waits for the next?
Yeah I know...trying to apply too much logic to a computer game from nearly 25 years ago. But I think its this kind of thinking that's pushed games to strive for more & more realism as the years have gone on.
@ikantspelwurdz (great name, btw), I won't be ready for that area for a long time, so hopefully someone else will chime in.

It's how old you seem, not how old you are. If your age was how old you actually are, it would be impossible to unnaturally age or to reverse natural ageing as it would only be saying how long you were on Varn, seeing how you can go back to 18 years old regardless of whether the ageing was natural or not it shows it isn't so much a measure of time, but a measure of wear.

Actually, the game doesn't forget as such, it's designed to have certain quests re-playable(of course, what it says you have done is based on party member 1, so if you have member 1 made new with a party that's done everything you will effectively have done nothing, at least until you swap positions) But one of the main quests is designed so that if you don't complete it right away when you get to the location that you complete it(or if you make the wrong choice there) you will have to do the preceding quests all over again. (delivering the scroll and finding the brothers to get caught up to where you actually are again)
Not to mention the king that decides you've outlived your usefulness if you talk to him after completing his quests.

It shows everything that you would normally see when you are able to press A for Attack, F for Fight, etc. It's not so much that the game has frozen, as the input mapping is suddenly screwed up - more on that later.
Actually, I went to this area a third time, and the third time, the fight proceeded normally, and I was able to visit every single fixed encounter of D2 without problems. But later, I encountered the problem a third time, somewhere in the northern area of E3.
This time, I discovered that you can fight by pressing F7, so I pressed F7 repeatedly until all the monsters were dead. But then the input was still screwed up - arrow keys no longer caused me to walk. Only the down arrow key did anything, and like in combat, it showed active protection spells. So I quit and reloaded, and on my second E3 run, I hit every fixed encounter in the forest without troubles.
Ok, status update. I guess I'm not getting started any more, but could use some advice on what to do next. My party looks like this right now:
Knight - LVL8
Battle Axe +2
Plate Mail +1
Large Shield +2
Paladin - LVL7
Battle Axe +2
Plate Mail +1
Large Shield +1
Archer - LVL7
Great Bow +2
Broad Sword +2
Chain Mail +1
Cleric - LVL8
Mace +2
Chain Mail +1
Large Shield +1
Sorcerer - LVL7
Club +2
Bracers AC 4
Flying Carpet
Thief - LVL8
Crossbow +1
Scimitar +2
Ring Mail +1
Large Shield +1
Robber's Tools
On my main quest, I just exposed Sheltem, but I want to finish all the side-stuff before finishing the game. I've done two side-quests for Lord Ironfist, but the third, discovering the secret of Portsmith, requires teleportation, which I don't have yet.
I've done plenty of exploring, and have taken notes of all the dungeons I've conquered, and also all the places which have lethal encounters that left me feeling hopeless.
I've conquered these dungeons:
Sorpigal Dungeon
Crazed Wizard Cave
Magic Square
And these locations have conquered me:
A1 - Gorgons
A2 - Red Dragons
B2 - Lich
B4 - Cave Giants (normally not a problem, but this encounter forbids magic)
C3 - 8-Headed Hydra
C4 - Curiously strong Killer Bees (and other monsters)
D2 - Specters
D4 - Paul Pead
E4 - Municipal counselors
Ancient Wizard Lair Level 2 - Basilisks
Castle Alamar - Fights over acid traps in the east hall
Castle Dragadune Level 4 - Evil Eyes
Castle White Wolf - White Wolves
Caves at the Korin Bluffs - Aliens
Dusk - Vampires
Portsmith - Lesser Demons
Stronghold in the Enchanted Forest Level 1 - Warriors
So, three questions, for the sake of total completion:
Of the deadly encounters I listed above, which should I aim to conquer next?
Am I most lacking experience, items, or balls?
If experience or items, what's the best place to go for what I need, that I can handle at the moment?

That is strange... I never encountered this bug. I guess it is good to know that you can reload a few times to get past it, but it would certainly be better if it could be fixed. Anyone else seen this?
Actually, discovering the secret of Portsmith does NOT require teleportation, but it is a bit tough so you might want to do it later. I think the main thing you need is experience... specifically, getting higher level spells. Getting stone to flesh means basilisks aren't as much of a problem anymore, for instance. And of course, leveling up will likely mean you'll find new items as well.
One suggestion is to take some quests from the other lords. If you use your cleric's "remove quest" spell, you will no longer be bound by the secret of Portsmith quest and you can take quests from the other lords. Since the quest rewards are experience, that can be a good way to gain levels. And don't worry, you can return to Ironfist to get the secret of Portsmith quest again later.
There are some places with tougher fights that give better experience but I'm not sure if you're quite ready to take them on yet. Get some quests from Blackridge North and Blackridge South in the meantime, then you can try returning to some of those tough areas. Also, just because there are some tough fights in an area doesn't necessarily mean you can't do the REST of the area yet, so don't be afraid to go back to some of the tougher spots and try again.
And finally: when I exposed Sheltem I was higher level than you are, but I still couldn't beat some of those fights that you listed (municipal counselors, for example). There are definitely some things in the game that are optional and designed for people who really want to max out their characters (a trend that continued throughout the series, if I remember correctly).

Alright, I've done some more questing. I've completed these:
Main - Exposed Sheltem
Lord Ironfist - Found the Jolly Raven
Lord Inspectron - Solved the riddle of the ruby
Lord Hacker - Brought Belladonna
Magic Square
Trivia Island
And I've postponed these:
Main - Find the Inner Sanctum (not ready)
Lord Ironfist - Defeat the Ghost Ship (Ghosts)
Lord Inspectron - Defeat Stronghold in the Enchanted Forest (Gray Minotaur)
Lord Hacker - Bring head of Medusa (Basilisks)
D3 - Climb all the trees (cursed fights)
Ancient Wizard Lair Level 1 - Find Black Queen Idol (Dinobeetles)
A3 - Wheel of Luck (Great Sea Beast)
And I don't really understand these quests:
Castle Dragadune, Level 4 - Hear the 3 Tones
Caves in the Korin Bluffs - Find one prisoner from each castle
To recap, here's my todo list, with the reason I haven't done it yet in parenthesis:
Combat:
A1 - Defeat Gorgons
A2 - Defeat Red Dragons
B2 - Defeat Lich
B4 - Defeat Cave Giants without magic
C3 - Defeat 8-Headed Hydra
C4 - Defeat Natives
D2 - Defeat Specters
D4 - Defeat Paul Pead
E4 - Disrupt counsel meeting and live
Ancient Wizard Lair, level 2 - Defeat Basilisks
Castle Dragadune, level 4 - Defeat Evil Eyes
Castle White Wolf - Defeat White Wolves
Caves at the Korin Bluffs - Defeat Aliens
Dusk - Defeat Vampires
Portsmith Defeat Lesser Demons
Stronghold in the Enchanted Forest, level 1 - Defeat Warriors
Quests:
Lord Ironfist - Defeat the Ghost Ship (Ghosts)
Lord Inspectron - Defeat Stronghold in the Enchanted Forest (Gray Minotaur)
Lord Hacker - Bring head of Medusa (Basilisks)
Castle Dragadune, Level 4 - Hear the 3 Tones (don't understand quest)
Ancient Wizard Lair level 1 - Find Black Queen Idol (Dinobeetles)
A3 - Wheel of Luck (Great Sea Beast)
Caves in the Korin Bluffs - Find one prisoner from each castle (don't understand quest)
Which of these should I do next, and what do I need more of to be ready for it, and where's the best place to get it?

Walls shouldn't be an issue here, I'm 90% sure there is a secret passage leading to the "Secret of Portsmith" although, the fight is quite tough.

You're right. I solved it, and without having to fight. I just ran away, and Lord Ironfist granted me the bonus.
Did a few more quests for Lord Ironfist, and now he wants me to defeat a pirate Ghost Ship. I found the ship and beat it, but suffered aging attacks from the ghosts, which I don't think I can reverse yet, so this one's on hold for now.
Post above updated.

I can help with some of the quests that you don't understand... the one that Ranalou gives you in his cave in the Korin Bluffs is a little annoying. Basically, you need to explore each of the six castles, find a prisoner in each, and then decide what to do with each prisoner. The problem is, you have to do ALL SIX without quitting the game, or the game won't remember that you've found them. I actually never got around to doing it, for that reason (I did find all the prisoners, just not in one playing session).
On level 4 of Castle Dragadune, exploring around should make the meaning of the quest clear. You will need to be able to get through magic barriers to complete it though, and I don't think you have the required spell yet, so you will likely need to hold off on this one.
As for the wheel of luck, you can get to it without fighting the sea beast (the sea beast always appears on the same square, so you can just avoid that square for now). If I remember correctly, the sea beast is actually one of the tougher fights; try looking for the scorpion in the desert or the flying creature near Algary first. If you can beat any of them, it's worth visiting the wheel of luck. The more you beat before visiting the wheel, the better the reward, but you can do it over and over again. So early on, you can just beat one fight and go to the wheel, and later when you're more powerful you can try to beat several or all of them before going to the wheel for better rewards.
What level are your characters now? Things get a lot easier as you get the higher level spells.

I understand that your reward depends on the actions reflecting your alignment. Whose alignment? The leader's? My knight (leader) and robber are neutral, and everyone else is good. Though everyone has a tendency to slip to evil (easily correctable with a spell) whenever I act in self defense against unicorn bandits.
Do I
A: Leave the prisoners alone, since my leader is neutral.
B: Free the prisoners, since 4 of my 6 are good.
C: Murder ponies until everyone is evil, then torture the prisoners.
Everyone is at level 8 now. My equipment looks like this:
Knight:
Battle Axe +2 2-10
Fire Shield AC 5
Plate Mail +1 AC 8
Paladin:
Battle Axe +2 2-10
Large Shield +2 AC 4
Splint Mail +2 AC 8
Archer:
Magic Sling 3-7
Battle Axe +2 2-10
Chain Mail +2 AC 7
Cleric:
Mace +2 2-8
Large Shield +2 AC 4
Ring Mail +2 AC 6
Sorcerer:
Dagger +2 2-6
Bracers AC4
Flying Carpet AC 2
Robber:
Crossbow +1 1-7
Scimitar +2 2-9
Large Shield +1 AC 3
Ring Mail +1 AC 5
So, at this point, would you say leveling up is more important than getting better equipment? And if so, where's the best place to get experience that won't slaughter my party?

The reward for the treatment of the prisoners is different for each character. If you want to get the best reward for your good characters, choose the "good" option (be aware that this changes depending on the prisoner; for example a good character should not set a demon free). This will result in less good rewards for your neutral characters though (I think... like I said, I never actually finished this one myself). I believe that when you are done, you can choose which characters will be judged, so you can just do your good characters and leave the neutral ones out of it if you want. Of course, I think you can just do the whole quest again, choosing the neutral options, if you want to get better rewards for your neutral characters later.
And yes, I think leveling is more important than better equipment. Or rather, gaining levels will mean you start to meet some tougher monsters who should consequently give better equipment as rewards. And gaining levels means better spells too. If you can defeat any of the fights for the Wheel of Luck, that's not a bad way to get some experience. If you can take on lesser demons, you can find some in Portsmith and they give pretty good experience as rewards. Are there any areas that you haven't explored yet? You can also keep checking out new locations to find enemies to fight.
Since you have been to Dragadune, I assume you have found the fountain? That is a useful way to boost experience for your spellcasters. Give your sorceror or cleric all your gold and visit the fountain, then just do a little fighting to get enough gold to train them. This way you can partially offset the slower leveling of your sorceror and help him/her get better spells faster.
Hope that helps!

Ok, I just spent the last 45 minutes or so attempting the judgement quest. I freed all six prisoners (I hadn't read your post when I did this), and then went to the statue at E1. All six characters were judged "Not worthy!"
What am I doing wrong? Even though I freed all the prisoners, I should have gotten *some* reward, shouldn't I? This was all in one go, without saving. I flew to the area of each castle and walked in, starting with A1 and the long walk to Doom, where I feed the prisoner. Then I surfaced, flew to B3, and freed the prisoners in both castles. Repeat for the remaining three castles - fly, walk, free prisoner, surface. Then I flew to E1, where all six characters were found unworthy.
I didn't bother with visiting Ranalou or use his teleporters. Is that bad? I'd try again, starting by using his teleporters, but I don't want to risk wasting another 45 minutes if that's not enough.

I'm not sure, so if anyone else wants to step in please do so. But my best guess is that you have to talk to Ranalou first, so that you "receive" the quest, and then do all the prisoners. But like I said, I never actually got around to doing this one myself so I can't say for sure. I don't know if you have to use the teleporters or not, my guess is not because the game doesn't usually track things like that.
Anyone else know how this one works?