I've played the Cataclysm once and had no particular issues with the Rules. I'll look through your list.
Q1- For the setup, do I only place Level 1 Curse crads on the appropriate town or do I place Level 2 and 3 under them?
You have to place the entire Curse deck on the appropriate town market stack. This means Curse Cards level 1,2 and 3.
Q2- The rules are clear when you fail a Challenge or Test, your Adventure step ends immediately. But what happens when you succeed other then drawing a Level 2 quest and placing it face up? Can you immediately attempt that Level 2 Curse and so on, until you fail?
It's not written, but the basic rules say that the Adventure Step consists of drawing a Challenge Card and resolving it (Events and Encounters specifically say to draw another card after resolving them). If you succeed against the Challenge on a Level 1 Curse card, you must immediately reveal an appropriate Level 2 Quest but I assume you have to proceed to the Experience Step. Anyway, each Level 2 Curse Card should have clear instructions, as we never had doubts during play.
Q3- It's stated that any player can attempt a revealed quest (Level 2 Curse cards). Can you still attempt one even if you don't have the corresponding Level 1 Curse card in your Victory space?
Yes, you can attempt a level 2 quest even if you don't have the corresponding level 1 Curse Card; you needn't have claimed a Level 1 curse card at all. As far as I can remember, quests were not easy to accomplish.
Q4- On the Level 2 Curse cards they talk about "marking" the quest with various counters to show your success towards that quest? What are the other counters except the undefeated marker you take on setup?
The other counters are general counters, that are not supplied. You can use other tokens (Fatigue, Wounds, gems) or coins, or grains to track quest progress.
Q5- Red experience counters: They're simply put back in the box without ever being used?
No, there are some Level 2 curse cards (quests) that require you to travel to the nearest red jewel, so you have to place them on the map as usual.