The 1.3 patch, due out within a week, is supposed to fix a LOT of problems:
http://forum.paradoxplaza.com/forum/showpost.php?p=10303934&postcount=9
I don't use the Theatre/unit AI's at all, but that's just my personal play style. I played 1-2 games under 1.2 but essentially am taking a LONG break until I see some good comments about 1.3. Playing the 1936 campaign is such a huge time sink that I don't want to start another game only to find in 1940/1941 that everything is still screwed up.