I'm not familiar with the Inter-rail passes as it seems most people on this site don't live in Europe. I assume they operate the same way as other multi-country passes and don't include the Eurostar. They also don't include berths on overnight trains (you have to pay a supplement).

Man in Seat 61 seems to have much of it covered on his website.
http://www.seat61.com/InterRail-pass-guide.htm#.USlCszfEY9g

Rail Dude has some supplements listed.
http://www.raildude.com/en/interrail-reservation-and-supplement

You'll spend a lot of time in trains and you'll have little time in the cities you visit. Inter-rail trips are often like that and still can be a lot of fun since you meet people on the trains and then sepnd one evening with them before moving on. If you're interested in seeing more of the cities, I'd cut out some destinations.

Regardless of the decision, I think that you're back-tracking unnecessarily (if there's no reason to be at one of the locations at a certain time).

If the Eurostar isn't included in your ticket, it might be safer to fly to a destination if you book four months in advance with a budget airline.

Without a real change: I think it's simpler to go from Cologne to Munich and then to Vienna and then (after the side-trip to Budapest) to Prague.

If you go from Berlin to Paris, you basically bypass Münster and Cologne. You could think about visiting while going between the two cities.

If you fly and are willing to leave out Bruges, Cologne has an airport with some cheap charters. You could start your trip there.

If you want to spend more time in cities and think about reducing the number of places, I'd recommend to leave out Budapest since it's really out of the way (and I like Budapest).

As an alternative with flying and leaving out places: fly to Berlin, then Prague, Vienna, Halstatt, Munich, Cologne, side-trip to Münster, then Paris (via Bruges if you stil fance the additional train ride).

As for costs, Prague is certainly the cheapest place on your route. Berlin is probably the cheapest big German city, Munich one of the most expensive. But over-all Germany is in my opinion cheaper than London. If you want to add cheap destinations on my last itinerary, Dresden is between Berlin and Prague. Bratislava is very close to Vienna and a fun town in summer.

Why do you return to Vienna from Hallstadt/Salzburg, before going to Munich?

Check out the message board on lonely planets thorntree...you will find lots more backpackers there...

Thank you - very helpful ideas. I feel like we are backtracking a lot and it would be nice to cut some of that out.

The only reason we return to Vienna is because from looking at train routes I assumed we would have to.

I'll check out thorntree, thanks!

Hans - thank you very much for your suggestions. I'll be sure to discuss them with my friend.

The main train route (east to west) is Vienna-Linz-Salzburg-Munich. So, Vienna-Salzburg is 2/3 of the way vienna-Munich already.
From Vienna to Salzburg: about 2 1/2 - 3 hrs
From Salzburg to Munich: 1h
How to Get To Hallstatt By Train:
Getting to Hallstatt by train from either Salzburg or Vienna is extremely easy. Trains from either Salzburg or Vienna require a quick train transfer from the national OBB train to a local REX train in Attnang-Puchheim. From Attnang-Puchheim, Salzburg is 50 minutes, Vienna is 135 minutes, and the connection to Hallstatt will take 25 minutes. The only goofy thing about taking the train to Hallstatt is that it actually drops you off across the lake from town and you need to take a ferry (4 Euros) across the lake to get to town. On the bright side, the ferry's schedule matches up to meet incoming trains and offers amazing coastal views of Hallstatt.

Ah, thank you, Watzmann, that's good news. Hallstatt sounds amazing. We really wanted to visit lakes, a have a day or two break from the city and Hallstatt seemed too wonderful to turn down.

I was wondering if anyone knows about the train from Munich to Prague? I read something about a sleeper but can't seem to find any times? Is a sleeper necessary for that route?