I understand the AI cheats at higher difficulty levels.  To an extent I don't mind it.  There are a couple rules/mechanics/consequences that it is very frustrating to see flaunted.

1. Resources.   
1. AI should still be forced to utilize resources to create units.
2. AI should not be able to go into negative values for resources - gold/iron/crystal, etc.
3. AI should get a (possibly dramatic) increase to resource acquisition.   i.e. they still need an iron mine, but while I may get 1 per turn, they would get 4 per turn (based upon difficulty level).  If the AI doesn't have an iron mine, or a crystal mine - they shouldn't be able to build troops without such. 
2. Mobs.
1. I understand the AI doesn't necessarily understand to clear an area before settling it - although I still don't see why.
2. It is VERY frustrating to see enemy units walking right next to, stopping right next to a dragon and nothing happen.   Actually pretty stupid.
3. Tarth has Stealth, Umber too I think.  No other factions should have this ability that costs a design point. 
4. If buildings are shielded, fine.  It is just DUMB that a lone settler can stop next to a dragon.   If my units get attacked, theirs should be as well.  

There are probably more - but these are the 2 primary frustrations.   I like the game.  I really like LH.   Many things are drastically improved.   After the MANY iterations, I just think that certain cheats are more immersion breaking than others.