Working from memory here, and I don't remember the maps, so...
I have 1st edition but we are playing with 2nd edition rules.
But not 2nd edition blocks, which will be important later!
1. The first big question is the thing that stopped us playing it last time.
Sea transport can only be used from 1 friendly port to another friendly port within 4 hexes. So, lets say the 2 sides are seperated by water (eg: Map 2 is in use as the northernmost map, and on turn 1, the south player captures Urbaka. How can the game actually progress from this point, since sea movement is only possible from 1 friendly city to another friendly city?
You're shafted. In 2nd edition, there are more naval units you can sticker up as part of any army (they're in the 'chaos' colours).
EDIT: You're British, you ought to realise how important a navy is!
1a. On a similar note, the city of Juslana on Map 4 - How can an enemy ever take this unless you leave it unoccupied?
I'm guessing that's an island city - same answer.
2. Castles. Can castles be built anywhere, or just where the gold is produced (i.e next to a city)
In 1st edition, only where the cash is produced. In 2nd edition, there are treasure blocks that can be built as units and can move around the board then be used as cash wherever needed..
3. Damage. Is damage applied one hit at a time?
Yes. Apply each hit to the currently
highest block (owner's choice for equally high blocks).
Basically, 1st edition blocks are compatible, but incomplete, for 2nd edition rules...