I just declared war on Brunswick and conquered it last turn. I have 3rd Corps housed in Braunschweig. I declared war on Saxony in the fall of 1806 (it is now 21 February, 1807) and have refused to agree to peace. I have corps housed in Cottbus, Dresden, Leipzig, Pirna, and Torgau for the winter. I was hopeful my invasion would trigger the Prussians to declare war. So, your recommendation is to agree to peace and use diplomacy to gain an ally? I knew the Saxons switched sides, but didn't expect that until later. I don't know how long a peace agreement with Saxony will last, nor how long it will take for Prussia to declare war after peace with Saxony.
As I noted in reply to another post, I am playing version 1.03.