templates always suck, IMHO :/
AS1 is bad, but if you're not developing directly yourself it doesn't matter much. performance is much improved in the later AS releases, but again it probably won't matter that much. remember the VM is only responsible for the speed at which instructions are processed and graphics are rendered - it won't be slower downloading images/files (where the vast majority of delay occurs) or reacting to UI events.
anyways:
*What (if any) are the potential problems using an fla file created in Flash 8, AS1? Would it be recommended to redo it in AS3 and if so, how potentially difficult would this be?
no real problems, if you're not developing. if you want to change stuff, it won't be as easy, or add new functionality - a lot of the newer bells and whistles just aren't available in AS1. you can really "redo it" in AS3 - you'd really need to start from scratch.
*This Flash does not use XML for the content ... is such a thing difficult to incorporate?
yes, it would be difficult. you'd have to develop that yourself (or hire someone), and redevelop the existing logic to load and accept the external data.
*Are the large fla file sizes abnormal or perhaps indicative of a problem? How big is too big for an swf?
i wouldn't say that's terribly abnormal for a template (which are always poorly constructed and bloated). how big is too big? that's up to you - there are tons of download guides on the net that tell you how long a file of a certain size will take a user depending on their connection (e.g.,
http://www.numion.com/calculators/time.html - never used it, just googled it up and took the first one that looked appropriate). that said, for most users, flash will begin to play as soon as it can, before the entire file is downloaded to the client. purely for reference, most of my swf are under 100KB, but i don't use the library much except for fonts or if i have to use a prefab component.
*What is an XMP file and how important is it?
it's just metadata - like the album, artist, track title, cover art, etc ID3 info for a song.
http://www.adobe.com/devnet/xmp/hth