If you just put it in and start it up normally it will try to install the 1.2 patch. If you want you can install it, or you can just cancel the patch and play without it. Most people have seen some improvement in gameplay with the more recent patch, though be aware that currently magic resistance is broken. It really depends on how much you plan to play - if you're going to play like 50+ hours every week then you'll probably want the patch or you may likely hit some gamebreaking fps lag before long, where if you'll only play maybe a couple hours a day it'd probably be a couple weeks before you ran into any problems so it's likely there'd be another improved patch by then.
Yeah, I'm a bit afraid of this magic resistance bug. As far as I know, even high-level characters have problems defeating dragons, sometimes even powerful mages. So it will be impossible for me to defeat a dragon if I'll be on level 10 or something. Backward flying dragons are also massive immersion killers. On the other hand, I'm aware of some strictly technical problems that had place before the patch - lags you mentioned, something connected with save size and some other I can't remember now. I think it is better for now to play with some lag than not being able to play at all because of being owned by every magic-using creature :/ I definitely won't be playing 50 hrs a week, rather 10-15.