The combat, while a bit on the awkward side, is pretty darn good. The block-style command selection is a nice call-back to the M&L RPGs and a very nice feature in this game.
The characters introduced into this episode all felt like they had a reason to be there, whether or not it involved Mario, which is very important in creating a believable world for this game.
The few hidden bits were brief, simple, and a pleasant detour. Great additions!
My biggest complaint is the limited movement, but I can definitely understand why it was done; the game probably would have taken ages longer if Mario hadn't been on a linear path, not to mention coding the movement itself in.
The dialogue moved along just fine and suited almost every character and situation. The humor really lent itself to the game and felt very natural. That said, a brief scuffle with Larry would have made his decision to work alongside Mario look a lot more desperate, and would have helped show its significant. I feel that this would have made his later choice to band together with Mario against Bowser a much more serious event, and one that could have really surprised the player. Here, it was kind of expected. The exchange about Bowser's obsession with beating Mario did set up Larry's betrayal, though. Very nice!
The only other thing I really have to complain about the dialogue is the sarcastic, snarky tone that Bowser's minions gave when talking about their king's previous failures. There was no negativity directed at their arch-nemesis: Mario! A more supportive voice towards their fearless Koopa King could have made Bowser a bit more likable as well. If he is to be a protagonist later on, building the player's sympathy with him, as you did with Larry, is crucial.
Overall, a very solid game with its own kind of charm, and reminiscent of the games that inspired it. I thoroughly enjoyed it. Keep this stuff coming, it's lots of fun to play!
P.S.-- Sorry for the long review. I'm just feeling very wordy right now. :p