FIXED... kind of.
Setting CPU cycles to 4000 has dramatically improved things. I saved my game just before the CPU's first knight attacked, then reloaded over and over while tweaking different settings in dosboxPOPULOUS.conf. Changing memory, CPU core, and CPU type did nothing. But after reducing the CPU cycles from 7500 to 4000, the knight's attack stole no mana from me. Interestingly, this seems to not be the correct behavior. On subsequent tests, the attack did steal a chunk of mana from me. However, it's now well within reason and no longer the game ending threat that it was before.
There are still a lot of oddities surrounding this issue. Strangely, the enemy's knights now die far more easily than before, and I also get a large chunk of mana back when I kill them. Setting my Walkers to Fight then Settle seems to be much more effective, too. They tended not to accomplish much without supervision, but this time they nearly eradicated the enemy once I gained the upper hand. I still see my mana bar swing wildly sometimes, but I'm definitely not in mana debt hell like I used to be.