I have yet to lose a war in FE. The AI can build up fine, but when the war is due, I always have a stack or two of elite units that wipes out his numerical advantage. Its still early days for the AI, but there is a lot to do as well.

The AI doesnt pick up free stuff and dont build some tough champs with good magic. I play on challenging/hard with dense monsters

Frogboy said that's fixed in the next beta drop.

Has anyone seen the AI try to specialize with cities? From the end games I've played so far and the cities I've stormed, it appears to me the AI philosophy is "If it can be built, it shall be built."

Yes, I want this fixed.  I hate taking over AI cities which were built on 3/3 or 2/2 tiles and have everything built on them.  I'm fairly certain the AI is not playing by the same gold maintenance rules we are so taking over an AI city becomes a maintenance disaster.  I end up removing half their buildings or just razing the city.  C'mon Brad!  Actually, it's not Brad's fault.  The city management/specialization in FE stinks so Brad doesn't really have much to work with.

Here are some ideas for improving this:

+ Certain buildings cannot be built unless there is a resource type available in the city.  You can't build a Barracks unless there is access to iron ore (or Gold if Gilden).  You can't build a study unless there is a lost library (or shard if Pariden).  You can't build a stable unless there is access to horses/wargs (or spiders if Krakis).  You can't build a magical forge unless you have both iron ore and a shard.  You can't build a magic garden unless you have both a food tile and a shard.

+ Certain buildings cannot be built unless there is a champion with certain abilities in the city.  You can't build a market unless a stationed champion has the merchant ability (or any champion if you're Capitar).  You can't build a training yard unless a stationed championed has the trainer ability (or any champion if you're Tarth).  You can't build an embassy unless a stationed champion has the diplomat ability (or any champion if you're Altar).

+ Each building has an upgrade option as the city grows

+ City upgrades should be based on specializing the city around mana, research, materials, training, gold, food, diplomacy, or capitals, or prestige.

+ Cities get 1 tile to build on per level (4 small buildings or 1 large building)

Asking for proof is rather silly if u ask me, and is just a measure to degrade someone's oppinion, instead you should post why you think it is incorrect.

That said I have seen the AI making some very smart moves, even though there was no evidence of him scouting my area, he waited with declaring war untill my hero stack of doom and destruction were somewhere on the other side of the world.
Seemed like a rather smart move, might just be coincedence.
I don't think the AI is considering the tech advancement or size of your cities when marching units in the direction of your territory, I am easily able to manufacture a huge team of heavily armored and highly equipped Knights before they arrive, so meaby the AI should start trying to get some faster moving units for the "blitz krieg" effect.

I do think the AI is decent for a beta AI, ofcourse alot of changes could be made, but so far the work has been good for a 2nd version of an AI!

That said I hope the devs ask for help if they want help in developping the AI for they're game, since I am fairly certain alot of forum dudes on here would be willing to put a few hours into finding bugs in the  AI.

+ I am having troubles deleting buildings, the demolish option is acting up, so big ai cities bother me usually, but most of the time I justt want to raze AI cities for outright silly "City-Level" choices.

Sincerely
~ Kongdej

It is notable that the AI players use crazy high tax rates, which probably messes up their economy realy badly due to unrest.