The game runs smoothly and without any noticeable problems, but I get this bug, where the moat does no damage at all to any of the units. Units are forced to end their turn when they land on a moat space, so that works as it should (I am not sure about the defense decrease, but it seems to work correctly). I remember, I used to run a different copy of the game on the same system and I didn't get this bug, so I don't know what changed. I am running Vista btw.
Thank you in advance.

Ok first off never heard of this happening before so have to ask a few questions to sort things out.

Are you playing the version from gog?
First off does your town have a FORT, CITADEL or CASLTE Built? (Forts don't have Moat and Tower town does not have them either)
What town was being ATTACKED when this happens?
Are you the ATTACKER OR DEFENDER?
What Town are the attacking troops from?

Pretty sure the first 2 questions will tell us what's up.

I've been playing the game for a long time now and it never happened to me before, either.
I had another version, but because of the bug I decided to re-buy it on gog.com hoping it would fix the bug.

Yes, I copied the save files to the gog version and now I am playing on that one.
Yes, of course, that's what perplexes me.
Well, it happened for every type of town, I think. From recent memory, I remember attacking and defending Castle, Stronghold, Fortress, Inferno and Dungeon.
Umm... it happens all the time, so I don't think it's because of immunity or something.
When I realized that it's clearly a bug, I started sending my own (Castle) troops into enemy moats, just to check and nothing happened. There's no taking damage animation and they don't take any damage. I mean, at some Halberdiers are supposed to die per hit.

I wouldn't mind it that much if it happened only when I attacked, but it makes defending a town so much more harder :(

I don't know if that matters, but I'm playing campaign... Maybe my save is corrupted?
I'll try to start a new skirmish game and check it there.

Yeah, after I wrote the reply, I checked the manual for SoD and it had a chapter on introducing trench damage. I never knew or noticed it was introduced only later.

I guess it can be a little unbalanced when defending against an AI enemy. Human player would know better than to throw his troops into those deadly damage dealing moats.

Thanks you very much for clearing this misunderstanding.