My concepts. REALLY LONG POST!
In between levels, you would go to the Guarded Inn, your version of the Cantina/Dex's Diner. You'd see characters walking around, and chairs could be destroyed. Magic could be used on oil lamps to blow them up.
Classic Knight: Has a lance. Works like an Imperial Guard.
Black Falcon: As above, but his spear gives him shorter reach.
Crusader: Just your generic swordsman. Think Obi-Wan without Force.
Crusades Archer: Like Captian Antillies. Attacks with dagger in close, and bow in far. Can be aimed.
Peasant: Operates controlls. Cannot build, attack, jump or pretty much anything else. Slow.
Shadow Knight: Long reach, and can slice horizontal with his halberd.
Danju: Like Qui-Gon. Can use limited magic.
Danju (2005): As above, but a little slower and enhanced attack.
Jayko: Like Jedi Luke. Double Jump, Fast, but weak attack.
Jayko (2005): His attack is average now, but so is his speed.
Jayko (King): As above, but can lead knights.
Rascus: Fast, can climb and grapple.
Rascus (2005): Can double jump and slide now.
Santis: Like Chewie. Big, Slow, Powerful.
Santis (2005): Now he moves as slow as possible, but has Chewie's arm rip.
Vladek: Average. Can lead Shadow Knights.
Vladek (2005): As above, but can lead Elite Shadow Knights.
Vladek: (2006): Can't lead Shadow Knights, but can lead Rouge Knights.
Elite Shadow Knight: Can deflect arrows. Slower than regular SK.
Rouge Knight: Fast but lower range. Otherwise like SK.
Bat Lord: Can lead Fright Knights. Limited Magic.
Fright Knight: Can operate seige machines better than other characters.
Bull Knight: Like Fright Knight, but slower.
Cedric: Can lead Bull Knights.
Willa: Magic user. Attacks with fists like Bib Fortuna.
Majisto: As Willa, but has a longer range with his wand. Leads Dragonmasters.
Dragonmaster: Better at riding than other characters.
Forestman: Fast, good range with bow. Think Ewok here, but tall.
Mini Kits would take the form of a treasure chest. The kits would be smaller versions of Castle vehicles, like a cart, seige tower, etc. Also, if you have save data from either LSW game on your memory card, the bartender at the Guarded Inn would let you buy an option to crossover the SW Characters! I know Castle and Space don't mix, but hey, LSW2 had the "Episode 1-3 Characters" option, so you never know!