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1) Milestones do not indicate level advancement. Milestones only set what stats a unit has when it spawns. If you want to make monsters that grow more powerful as they level up, you must use traits that boost stats <PerLevel>

2) Compatibility with Stormworld is completely dependant on how you approach the problem. If you are going to edit all the core champions, for example, you'll need to edit them in A_LIB_UnitStat_BG_v*/CoreReplacementFiles/CoreUnits.xml. Stormworld_Expandedfactions also has its own champions in Stormworld_ExpandedFactions_Champions. Also Sovereigns found in Stormworld_ExpandedFactions/expandedfactions_units_sovereigns.xml. There are also various monsters spread throughout the modpack.

Something to keep in mind about making something like this is people will expect updates when the vanilla game gets patched. Stormworld is also a work in progress which means I am adding more stuff on the go.

Level and level milestone is a weird way to word it. One should be called spawn rating and the other should be called level. Anyhow, the level milestone is just the base stats of a unit at level 1. Going to level 2-100 works the same as any other unit in the game. You get some accuracy and some Hp. But each unit that is spawned in the game, either from the start or from spells or whathaveyou, can be given more or less base stats by increasing their level milestone. You can even set up custom level milestones for any monster or unit. Each unit's default base stats are determined elsewhere in core unitstats, but some nice modifications can be done with level milestones to add some uniqueness to units.

Interesting, one more quick question, is it possible to set up a trait that is hidden that  changes the scale of a monster?  So basically a baby dragon will get eventually larger.  The same thing could happen for a bear i suppose as well.

Interesting.

Is it possible to change one type of creature into another after it gains so many levels through scripting?  Once again using the dragon analogy since it works, a baby dragon into an adolescent dragon, adult and so on.  This combined with the Idea of having small dragons spawn from a dragon lair would make it kind of scary if you left it alone for too long. Imagine a bunch of aggressive adolescent dragons running about near a dragons lair.  Or more simply this could be adopted for any animal type, maybe just wishful thinking.

Ok, so while the lair can level up with the according guardian monster from it the wandering monsters can not do the same at this time.  However both monsters can level up per the level function every ~50 turns.  Where in the code is the time for lair level ups controlled at?  Within the goodie hut coding?  

So you could theoretically make a lair with an adult dragon that levels up accordingly, after x turns the lair upgrades and then shows that there are now baby dragons within the lair after xx turns the lair levels again and then adolescent dragons now could stat wandering the countryside.  Does this sound right?

Right it does sound.