Which brings me on to the question, if I'm only allowed to build ~120 of each unit how on earth can I take on the AI and where does the figure of 30,000+ units come from?
I think the average ship cap is a bit higher than that. As the game progresses and you gain access to new ship types it's not uncommon to have a fleet consisting of several thousand ships.
The total number of ships on the map at once can easily number 30,000+. This is including your own ships and the ships that AI has defending its planets. In truth, 30,000 is actually a pretty conservative estimate - it could potentially be far higher, especially in multiplayer games.
As for why you can take on the AI, you just have to be in the right mindset;
The AI is the uncontested ruler of the galaxy, humanity has been forced to withdraw to but a single planet. The AI no longer perceives humanity as a threat, after all, they have limited resources and inferior technology, so it focuses on furthering its own agendas, though the nature of its goals are unknown to us.
The AI Progress can be thought of as a general indicator of how threatening the AI perceives the humans to be. The AI does not take kindly to humans destroying its Command Stations and Warp Gates, hence doing so causes the AI Progress to increase. Since the AI then considers the humans to be more dangerous, it devotes additional forces to defending its space and attempting to destroy them, and the AI's reinforcement rate and wave size increases.
This is where the grand strategy of the game arises. If humanity attacks the AI indiscriminately, the AI Progress will skyrocket, and the AI will devote a huge number of ships to eliminating the humans, and you will be destroyed by overwhelming force. Therefore, to win the war, humanity must choose its targets carefully, and strike only at key strategic locations.
Oh, was that a bug then?
I mean the three scores, AI 1, 2 and myself.
Obviously I start at some tiny number such as 10k, AI 2 (lvl6) was around 140k, AI 1 (lvl7) was just shy of 700k.
It pretty much meant after an hour or so the first major wave just walked over me.
The scores are unrelated to the strength of the AI. The AI will often start with a fairly high score owing to the number of planets and ships/structures it controls.
Sorry to hear the AI got the better of you that time. Only the AI Progress level should affect the AI's reinforcement rate and wave strength.