Hi Steve,
And welcome on Secret Japan's forum. Indeed, Yamada Onsen is a very nice place to visit, quite isolated but still easily reachable - at least by car.
There are several nice places to stay, including the mentioned Goshiki-no-yu and Taki-no-yu. Personally, I would strongly recommend Taki-no-yu, which is perhaps the best quality-price ratio I have seen in Japan for an onsen place. Sure, the rooms are rather small (normally 6 tatami for 2 persons) and do not have private toilets/bath (toilets can be the way be quite chilly in winter). And the ryokan itself is rather old. But if you can live with that, you are sure to get warm rooms (the pipes bringing the hot water for the bath are running under the rooms, thus warming them), excellent food (dinner is served for all guests in a large room - but you need to go in another building) and fantastic rotenburo (closed at night).
For 8400 yens (last year's price), it is a great deal.
On the other hand, Goshiki-no-yu has larger and more comfortable rooms, and at least one wing of the ryokan is rather new (the one containing the inside baths). But the entrance itself is not very nice, and the outside bath is definitively less good than Taki-no-yu.
For the transportation, I always went there by private car - renting a car is relatively inexpensive in Japan, but available only to people who have the right to drive there (check the thread on
Driving in Japan). From Nagano, you can alternatively take the Nagano Dentetsu to Suzaka (5 times per hour, 26 minutes). And from Suzaka, there are local buses going toward Yamada Onsen (40 minutes). Le time table for that bus is here :
www.nagadenbus.co.jp/local_suzaka/yamada.html
You can arrange with the ryokan of the area a pick-up at Yamada Onsen, as both Goshiki-no-yu and Taki-no-yu are located 5 km from the town.
Hope this helps, please let us know your impression if you get to do this trip.