Difficulty level changes what exactly?

[parjlarsson]

I searched the wiki & game manual and found nothing.

Doesn't seem to do much with the combat AI.

Does seem to do much with numbers of scientists and money stuff and diplomacy (i.e., ease with which you can lose the game).

Does it affect air-to-air combat?

Insane difficulty seems to lose Stilettos a lot, and I thought I played almost perfectly but lost easily after a month and some days. Seems multiple bases are a requirement right off the bat?

[Sarin]

I did a quick test on insane diff...

Compared to standard diff, aliens don't seem to be tougher, but there is no way to really know if they are better marksmen...UFOs don't seem to be tougher either, Stiletto with normal load (2x sparrowhawk, SHIVA, ECM, TC, no armor) was able to shoot down fighter with no big problems. I wasn't able to get some data about speed of alien advancement, that is also a factor I think...

[Lew Yard]

If memory serves, difficulty level aside from normal does apply a percentage modifier to damage prior to any other modifiers (armor, throughwall penalties).  Never looked into aerial combat mechanics.