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One more clarification for future generations - I've found posts elsewhere that say losing all items is indeed correct for the Archives version of Wizardry 2. It sounds like other versions may have retained the items that are also findable in Wizardry 2.

My game is definitely running smoothly, I've finished mapping level 1 and found it pretty easy going for my party with new equipment - so the Archives behavior of restarting all equipment was not a big obstacle. I found a few upgrades so far from the stock available at Boltac's, but still have plenty of non-magic weapons and armor to improve upon.