Here's what I know so far...

The order and locations are described by

notes in Saradon's Workshop.

Word locations:

First: Grey Crypt, location unknown (word is SHIELD)
Second: Maze of Dread, location unknown (word is MALLET)
Third: Fanskar's Castle, N20 E21, "To the worthy I reveal, a dream to mend, a dream to HEAL."
Fourth: Oscon's Fortress, level 2, N16 E19, "Sword or mace or axe or pike, dream a dream to gain a STRIKE."
Fifth: Dargoth's Tower, location unknown (word is DISRUPT)

The order and locations are described by

notes in Saradon's Workshop.

Word locations (thanks to Icculus for 1/2/5):

First: Grey Crypt, level 2, N11 E4, "If the spell of dreams you wield, safe you'll be behind its SHIELD."
Second: Maze of Dread, level 2, N9 E10, "Though enemies wear plate and sallet, a dream can crush them like a MALLET."
Third: Fanskar's Castle, N20 E21, "To the worthy I reveal, a dream to mend, a dream to HEAL."
Fourth: Oscon's Fortress, level 2, N16 E19, "Sword or mace or axe or pike, dream a dream to gain a STRIKE."
Fifth: Dargoth's Tower, level 3, N8 E13, "Illusions cunning and corrupt, a dream can shatter and DISRUPT."