On most maps, cities are the most important resources. They usually provide more gold than mines or windmills, and often provide generate mana and research as well. Efficiently managing cities is vital to success. The first thing you should pay attention to is the terrain that a city is in. Certain races have morale penalties in various terrains. Additionally, not all races can build crop fields around a city in certain terrain. Crop fields are those farm-like hexes that surround cities- each crop field gives an extra 2 gold a turn to that city. Only frostlings can grow crops in snow, only undead and dark elves can grow crops in wasteland, and only tigrans can grown crops in deserts. I don't believe any race can grow crops in swamps. Not being able to grow crops can really significantly hurt your gold production, as I believe crop fields can grow over time. (Also, windmills have crop fields around them also.)
The morale of a city is pretty important. If it's in anarchy or enslaved, that means the city basically hates you and will rebel eventually if you leave it unguarded. At that point, you might want to migrate the city to a friendlier race. The units it will produce will have bad morale anyway, and may not be too much help in your army.
Certain structures also increase morale, but I usually do not build these just for the purpose of stability. The morale enhancing effect of the structures do not carry over to the units built by the city, so you might as well just migrate it. Keep in mind, however, that during migration the city will give you no gold or production, which can hurt your plans. Sometimes it's better to hold on to a poor morale city just for the extra gold.
The next thing to keep in mind is how that city will optimally use its production capacities. This often means considering the use of hurry production. You must use this function effectively against a good player. Remember, you want to build turn advantage as much as you can. Hurry production is one of the best ways to do that. You get your troops out faster, and get structures built quicker. But it takes some practice to wisely use hurry production, because with the latest patch (1.2) hurry production can kill your cities. Each missing coin costs 20 gold and 20 population to hurry. Most level 3 towns only produce 30 pop a turn, so if you are constantly hurrying more than 1.5 coins a turn, your city size will eventually decrease. Not to mention you will soon run out of gold. When your city size decreases, not only do your cities produce less gold and production, it may change also change your alignment. This can be a real problem if you have an empire with races that don't like each other. You don't want your charioteers in your army to suddenly rebel because you hurried a titan in your capital and halved your archon population (which happened to me in one game). One good rule to keep in mind is to not hurry more production points per turn than your population growth rate. Suppose you have a level 3 archon town with a shrine of nature. Its population grows at 40 people per turn. You optimally don't want to hurry more than 2 production coins per turn. If you know that you will only hurry every other turn, then you can optimally hurry 4 production coins every other turn. If the production in that town is 50, then you can efficiently build charioteers every 2 turns without suffering population loss (charioteers cost 130 gold, and at the end of two turns you can hurry the missing 3 production coins while still gaining population since you have 4 missing coins to spare every other turn).
There's another twist to city production that is not mentioned in the manual. Every so often your city will accelerate production, finishing a project several turns early. There is a chance of this happening if the city has high morale. So, when possible, try to keep your cities 'cheerful' to take advantage of this event. Taking peacekeeper, temples, and shrines of orders raise city happiness, as well as certain events described in the manual.
The first thing you might notice when deciding what to build with a city is that there are a lot of cool structures that you can build. Farcaster, library, hall of enchantment, enchanted walls, extra wizard tower levels. Don't plan on building most of these structures, however. The most important thing you can build in cities are troops. Remember, you are in a race with your opponent and if you spent most of your resources building nifty structures while he builds an army, guess who will end up having owning all those structures pretty soon...That being said, it is important to build certain structures. The war structures (barracks, war hall, champions guild) are obviously quite important for building key combat units. The production structures (builder's hall, siege workshop, masters guild) can also be real important in getting out troops as early as possible. What you have to do, and this takes some experience, is determine what each of your cities will serve from a long-term standpoint. Anytime you capture a city, you need to incorporate it in your long-term plan. Don't just build blindly. A lot of will depend on the types of troops you are going to use, which I will discuss later. What I want to emphasize here is being able to analyze how a city's production capacity will affect what it should build.
In AoW2, excess production points are wasted. That is, if you want to build a monastery that costs 120 gold, both a city with 80 production and a city with 60 production will produce the monastery in two turns. The excess 40 production in the first city is simply wasted (note, however, that it would save you 40 gold and pop if you wanted to hurry the monastery in one turn). So you do not want to build structures that increase the production capacity of a city if, in the end, you are going to use that city for troops that will not need the extra production. So my suggestion is, when you acquire a city, to decide early what troops you think you will produce in that city and gear the production towards efficient building of that troop.
For example, let's say you conquer a draconian level 3 town that already has a war hall and builder's hall. It has a production of 40. You scout a production resource nearby which you can use to build a champion's guild, and you plan on using this city to produce flyers. Flyers cost 160 gold. It would take 4 turns to make a flyer right now. But if you have a siege workshop, its production will increase to 50 and you can build fliers plausibly in three turns if you hurry production on the third turn for the extra coin. It would be worth investing in building a siege workshop if you feel you will own this city for the long-term, because you'll be able to efficiently crank out flyers every three turns instead of four turns. But if this city is on the front of the war, then perhaps you think you just want crushers, and perhaps rush build the occasional flyer or two when there's enough population. Since crushers cost 80 gold, having a siege workshop will not help you that much, because it will still take you 2 turns to build with or without a siege workshop. Although having a siege workshop reduces your hurry cost by 20 gold and 20 pop if you choose to rush a crusher in one turn, you won't be able to efficiently rush crushers every turn without crippling your town (your 1 turn crushers will cost 60 pop and 140 total gold). So you should just start cranking out crushers immediately every 2 turns while occasionally rushing the flyer.
There is no one optimal build order for cities. It all depends on the map, and how much breathing room you have with the city. On large maps you can reasonably expect to have some more time to build structures. On small maps you should immediately focus on building an army. Cities that you acquire earlier on will generally have more time to develop; so you should anticipate using your starting city as your most powerful troop generator. As you get closer to your enemy, newly captured cities should generally go straight to producing troops, even if it's just level 1 troops for a garrison. You don't want to waste time developing a city that is likely to be captured by your opponent- that will cost you some serious turn advantage. If you are playing on a typical medium or large map and have a starting army, it would probably be wise to upgrade your capital to a champions guild as soon as possible. If you have no starting army, however, build some troops first before you start upgrading. Otherwise you will fall behind in expansion and resource gathering.
Production resources are quite helpful in city development. There is an unfixed bug (as of version 1.2) which allows you to pick what type of structure you want awarded when you capture a resource. Whatever buildings are in the queue will not be offered as an award for a production resource. So you can use this to get free key building structures, especially expensive ones like wizard towers, master's guilds, and champion guilds.
Keep an eye on the population of a city. Certain spells can reduce the population, but it probably happens the most with over-use of hurry production. Remember, you get some serious drop-offs in production and gold as you decrease city levels, so try to keep the population from going down to the level below unless you're in an emergency.
If you know you can't hang on to a newly acquired city, consider selling off its important structures. You can only do this one structure at a time, but you can salvage half of the structure's gold for your coffers. When you have concealed scouts in enemy territory, this is an effective tactic- take undefended cities and flee back into the woods while selling off key structures before he takes it back.
On a related point, don't forget to put garrisons in your important cities. Leaving cities empty is tempting when they are well behind the front lines. But you never know when a concealed scout like a gladerunner can come through, and you don't want to let your opponent have those key cities for the taking without a fight. And it's always a good idea to keep a garrison in your last tower city.