Re compatibility, I never came across software that didn't run on it. I'd read in magazines that there were issues, but never once experienced it. One interesting software change, though (but true of other XL computers, too) was that the color "artifacting" worked differently on it than it did the 400/800. For example, Ultima III used color artifacting, and so playing it on my system produced some incorrect colors...most notably the sea was red.
I did come across one hardware issue...a cheap third-party parallel interface adapter that didn't work, and that we thought at the time was defective, but I now think it's likely to have been affected by the incorrect power wiring in the 1200XL's SIO adapter. It was cheap enough that we didn't lose too much money on it, and I ended up getting the far superior ICD P:R: Connection instead.
The Atari community was a super great community to be in. And in so many ways, Atari was doing things that wouldn't be seen again for years, if not decades. Atari's SIO port is famously a predecessor/inspiration of USB. The APX Exchange was basically a third-party app store decades before Apple popularized the concept. The machine was hackable and moddable (I bought a 256KB upgrade kit for mine). When I migrated to PC for college use, it hurt to have to fall back to CGA...even EGA was just ugly, compared to what my 1200XL was capable of (although the 80 column displays were nice compared to Atari's 40-column).