A very solid beginning.
I'll admit it right now, I'm being more generous than I normally would with the stars considering the mediocre production values because frankly, I see a hell of a lot of dedication and heart in this. I'm excited to see where you will take this.
Many people will bring up The Story of Khale and Brackenwood. Sure these are woodland fantasy tales, but honestly ignore these people drawing comparisons. They're idiots. This is clearly your own entirely unique universe with it's own mythos and such.
So now on to the technical critique; things I'd love to see you work on for the second installment.
First off, those backgrounds. It's nice to see them fully rendered as they are. Lots of detail, lighting and so forth. The problem is, they're overshadowing the characters. Never let the outlines in your background be thicker than the outlines of your characters. Rule number one right there. Also, if your outlines are going to be coloured make the contrast more subtle in the background and more apparent on the character. It will help the focus pop more and keep the viewers attention.
Second, the character animation itself. It was very static. The walking sage firstly didn't match, perspective wise, the way he crossed the environment. Try to make sure a profile view has a profile walk. Right now he was 3/4 walking completely sideways. Very odd. Secondly, try to get some more dynamic and exaggerated poses in that walk. It's nice to see those frame-by-frame legs, but why not step it up? Really get the whole body turning and moving, bouncing up and down a little even. It will add a whole new dimension of activity.
Finally, clean up that linework. The outlines on the backgrounds and that airship felt quite hasty and scribbled. Try and take the time to really sit down and clean that stuff up. A big example is the highlights on the trees. Try to make those really curve to fit the form of the tree. Right now they seem almost tacked on, and sort of distract the eye. Just make sure things don't look like they were coloured with crayon on paper I guess. You have the chance to easily clean up your work and have these professional backgrounds with software like Flash. Take advantage of that.
All in all though, a stupendous effort. I've very impressed with this and the imagery really does provoke a certain interest and investment in the future of the plot. Not alot happened, but what did really hooked me. I see alot of untapped storytelling potential waiting to erupt out of you man. I eagerly await episode 2.