The game is challenging on Hard (though it would have been nice if friendly fire had been enabled there too), but the challenge comes not from the ruleset as it does in Dungeon & Dragons games and not from well-designed monsters with a variety of abilities as it does in Diablo-like games, no, it comes from the sheer numbers of enemies zerging your party and from that second wave of enemies spawning in all around you, literally out of thin air in most cases, which is the laziest design possible.
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Level scaling once again proves to be an abomination and a slight against God, ruining both combat and the item system. Every time you level up, you actually get weaker. Your to hit chance and armor rating go down (because enemies to hit chance and armor rating go up), which is absolutely retarded. So, your equipment, including unique items, lose their value faster than you can blink, and priceless artefacts of yesterday are quickly surpassed by the local mass production. If you want to maintain your combat worthiness you have to hit the shops after a level up or two and buy (often the same looking) weapons/armor with a 5-7% increase in stats. I call it the hamster wheel design.