At least, according to cdifan, who wrote a tool to reconstruct the password list after you have played three levels (and received the first three level codes)
cdifan: "Dimo's Quest generates the complete password list from a single 4-byte random value that is stored in NVRAM.I've known this for years and wondered if a few passwords leak enough info to allow reconstruction of that random value?
It turns out that the answer is yes; the minimum required number of passwords seems to be three.
So you can play the first few (usually three) levels and use those passwords to generate a full password list. This should answer all concerns about full playability of Dimo's Quest without a working NVRAM."
"The Dimo's Quest CD-i title issues level passwords after each completed level. By entering this password, the user can start directly at the next level. The list of passwords is different for each CD-i player, because it is generated from a 32-bit random number stored in the first four bytes of the NVRAM file "Dimos_quest". When this file is first created the random number is generated based on the current time, which in practice means that it is unique for each CD-i player.
If the CD-i player has an empty NVRAM battery, all NVRAM contents will be lost each time the player loses power. The effect is that all previously issued level passwords become useless. The level password generation algorithm leaks enough information that a few passwords are enough to uniquely determine the random number and thus the full set of generated level passwords. In practice it seems that three full passwords are exactly enough to uniquely determine the full set.
What this means is that after losing NVRAM, the user can just play the first three levels (which are easy) and then use this program to generate the full level password set. By entering the appropriate level password, any level can then be reached. Each password has 8 characters, consisting of 4 consonant-vowel pairs. Dimo's Quest generates the 50 * 8 = 400 characters of these passwords
as a single run of 200 pairs. Each pair is generated from 8 bits of a 16-bit random number half,
which means that it determines some possible values for those 8 bits. The generation algorithm used implies that each pair determines from 1 to 4 possible values for those bits.
The random number iteration algorithm uses a 32-bit random number, but 16 bits of these are always equal to the other 16 bits of the 32-bit random number from the previous iteration. This means that the first two pairs determine from 1 to 16 possible values for 16 bits of the 32-bit random number. The remaining number of values is at most 16 * 2^16 = 2^20 which is small enough that just iterating over those and matching the generated pairs against the specified pairs is fast enough to be feasible."
The full source and a Windows executable can be downloaded here: http://www.cdiemu.org/download/dimopass.zip.
[Thanks, cdifan]