Hello, I'm buckling up for my first playthrough. So...

1. 1.13 or no? I've heard it makes the game harder, but... why so? Was that one of the goals of it? And...
2. What difficulty setting?
The challenge I want is for the game to ask whatever it wants of my intellect and discipline, but I don't want the game to punish me for inexperience or it's own faults. I usually play games on the second-to-hardest difficulty setting, citing that the hardest "might be made with veterans of the game in mind". In short, my philosophy for difficulty is that the game should ask the very best for my problem-solving and discipline, but not ask any inhuman feats of calculation, intuition, or etc. The selection becomes tricky with 1.13, what with an added difficulty level. My immediate assumption was to play it on Experienced, with Expert being for people on their second playthrough and INSANE being for die-hard fans who even understand fragments of how the game is coded. And if with 1.13, what about the Drassen counterattack? It would seem iffy not to have it, but it wasn't in the initial game. And if with 1.13, what about Max IMP? Since 1 is what the initial game went with, that would be my assumption.
Other notes?

Have you played JA2 before? Are you familiar with the gameplay mechanics? If both yes, do a quick run (to Drassen or Cambria), then install 1.13 and start over. If you haven't played before, play without 1.13 first to get familiar with the mechanics. Whichever makes sense to you. I'd suggest skipping novice, but I can't really recall the differences between expert and experienced (other than different starting cash).

As for the rest of the questions.
INSANE difficulty was added mostly because 1.13 had quite a few things going for the player (enemies didn't use scopes, thus had lower visibility, player having better weapons, ability to modify weapon availability etc, etc.) Biggest change for INSANE is that the queen has unlimited troops, and a very short time between decisions (4 hours per action instead of 12). There are also a few more modifiers, like a cornered enemy will get a fearless morale (Cornered? Kill them all) instead of a broken one (Cornered? Better surrender).

Drassen Counterattack can be turned off through the ini file, but it is one of the best battles in the game, thus the reason why counterattacks were added for the rest of the cities as well (also toggleable through the ini). The code for it was included in the base game, but for various reasons (mostly balance ones) wasn't enabled. Same with airstrikes, though those still don't work.
As for the IMPs, for the base game you could always assume the IMP was your avatar in the game, but some people want to do a specific team (there were quite a few attempts at A-Team takes Arulco). While currently you can have up to 7 IMPs (though the 7th one requires a bit of tinkering to enable). On the other hand, they are dirt cheap mercs without a reccuring cost, so some people do consider more than a couple to be cheating.

So, play through the vanilla game at least once, then install 1.13, and should you have any questions, don't hesitate to ask, either through a post in these forums, a post in The Bear's Pit or by asking in the irc channel.

Hope you enjoy the game :)

I've already played up to attacking Drassen in 1.13 in a not-so-serious run.
Wow, so you're actually partly advocating INSANE - 1 IMP - Counterattack?
What about weapon drop and item progression?

Any opinion on difficulty change if playing with drop all off?

It (obviously) becomes a bit harder, and you have 2 options.
1) Live with what the enemy drops, thus having less equipment than you would with drop all on. Depending on Bobby Ray and money setting, this may or may not be a problem.
2) Try to steal everything from everyone, thus making combat a lot riskier. You need someone who is good at hand to hand (or martial arts), and someone to help identify which enemies have loot worth stealing.

So it's a personal preference thing, but I hate it if my guys are getting shot at with a big sniper, and I don't get it after combat ends.

Thanks for your response :)