Calling it now, Lily totally knows the new Kaoru is a woman and is perfectly okay with it.
She should have noticed by the clothes, I think. But it's not too much of a reach to think at this moment she's in denial and ignoring the differences she might feel (hand size, different attire, voice, previously long hair, boobs?, is shorter than Kaoru). And her getting out of this denial will be as dramatic as Hana deciding to become her brother.
But she will definitely be ok eventually. Hana's motives are as noble as they are tragic, and she's bound to fall in love with this shorter, high-pitched voiced Kaoru. Maybe Hana will have to eventually fake herself coming to visit her brother and Lily will start seeing the girl as a good friend — getting to know the real her, having a conversation not smudged by lies, just talking to Kaoru's little sister (with only the omission of a trick being played and this being the same person to begin with).
Anyways, I am usually a wuss who doesn't go for drama, but this is a PERIOD Drama so I am all for it. Can't stand the idea of waiting until June for a 2nd chapter.