Before I posted above I double checked that bread worked by loading a save in act 2 and dropping all food except bread, then using the bedroll to rest (dropping the count for the stack of bread by 1), twice.
There is a book with the individual healing spell shortly after you jump down the pit in the arena. I had both characters learn level 1 then, and eventually got both to level 2.
Yes, a few people ran into a problem with that cutscene. Leave the DK on the other side of town, and approach just with your hero, and the cutscene should proceed normally.
Killing a couple minutes before being able to rest again (wasn't sure what the original count was for bread), I actually ran into the imp 'hero' in my save and got this cutscene.
