Not sure where I went wrong, or what I have forgotten to do, but my progress is now frozen. I finished off Dragon's Eye, but on the 2nd level, it seemed that the prisoners would not leave the area. I searched and searched for other Trolls, etc, nothing. I finally left and finished the other levels and returned to Kuldahar, and found it invaded by Neo Orog's. I killed all that I encountered, and went to see Arundel. After leaving Arundel's after he died, I find the townspeople still terrified of Neo Orog's, and I can't find any! When I leave the town it has the battle icon above it, as does Dragon's Eye. I have been back to both area's 4-5 times and searched everywhere, there are captive's on the first level who thank me for freeing them, but that's it! I don't have the Severed Hand on my map yet, so I'm assuming I have missed something, but can't find it. Help!!!

You have to scroll the travel map to see Severed Hand. It's a long journey.

The captives on the various levels of Dragon's Eye are sometimes very slow to leave. However, there's nothing more you do with them. You do not meet them back in town (except for Conlon's son) and no one in town will ever mention your rescuing them. I guess they go back to nearby farms, not to the town itself. Likewise, the priestess Egenia does not return to Kuldahar, even though she eventually leaves Dragon's Eye. No idea where she goes, though.

I don't know what you mean about a battle icon. There is an icon that shows up above locations on the travel map, but it's just to indicate where you are, not the state of the area.

And yes, the game does seem to get a bit confused about the neo-orogs. The innkeeper in Kuldahar complains about them throughout the rest of the game, for instance.