An ingenious person (Lord Bula) over at twcenter has created a workaround for the battle difficulty bug. Essentially what this tool does is allows you to modify AI armies with respect to the following parameters:

unit cost
unit upkeep
pri attack
sec attack
defence
armour
shield
morale

I can wholeheartedly recommend this utility and it's gone a long way to restoring some challenge to tactical battles with the AI. Unfortunately, siege AI remains an abhorrent and bug-ridden mess, but at least the AI's units can be improved.

Here's a link:
http://www.twcenter.net/forums/index...howtopic=25600

I'm currently trying out the AI with a +1 to pri/sec attack, +3 to defence and a +3 to morale.