X-COM has five different difficulty levels that can be selected when starting a game:
The difficulty level chosen has several effects, described below.
Intercepting UFOs becomes substantially harder on higher difficulties. The cycle time of all UFO weapons is reduced by an average 3 frames per difficulty level (they fire more often), resulting in greater total damage to craft that enter a UFO's weapon range. Additionally, the time before a UFO begins to outrun a slower X-Com craft (such as an Interceptor) is reduced by 30 frames per difficulty level, making it harder to crash-land or destroy UFOs before they flee.
While most Alien Missions remain unchanged across the difficulty levels, the aliens become far more proactive about destroying X-Com as difficulty increases. The chance per successful interception for the aliens to retaliate increases by 4% per difficulty level (from 4% on Beginner to 20% on Superhuman!). Furthermore, the aliens will launch automatic Retaliation missions one month earlier per difficulty level.
If the funding nations score X-COM badly for two consecutive months, they can decide to terminate the organization. The minimum bad score trigger is affected by difficulty:
The total number of aliens found in each UFO or mission type are the same for Beginner and Experienced difficulty levels. On Veteran/Genius level approximately 20% - 40% more aliens will appear than on Beginner/Experienced level (depending on UFO type). On Superhuman level 50% - 100% more aliens will appear. See the "Alien Deployment" section of each UFO page for specific numbers.
Several key alien stats will increase with each difficulty level. The alien stats which change are:
|TUs, Energy, Psi Strength, Psi Skill||100%||104%||108%||112%||116%|
These percentages are modifiers to base alien stats, which can be found on the Alien Stats page. Unlike all other aliens, Zombie stats will not increase; all stats will be at "base" level regardless of difficulty level. Zombie-spawned Chryssalids will also always have base stats. In addition the USG states the aliens' "remember" the location of X-COM units longer on higher levels.
All DOS versions of X-COM have a bug which causes the difficulty setting to revert to "Beginner" after the first combat. XcomUtil and several other utilities can be used to fix this bug.
Dynamic Difficulty Adjustment System
Quoting from Julian Gollop's  at 'Classic Games Postmortem - XCOM: UFO Defense' at Game Developers Conference 2013:
"The way this worked was very simple. Basically, if you did very well on the last three previous tactical missions and you absolutely trounced the aliens, the aliens would ramp up their own technology level and deployments more quickly. If, on the other hand, conversely you did very badly, the aliens wouldn't throw in some extra stuff. So it kinda adjusted the difficulty as you went along."
This was never implemented, however. Instead it resulted in the now infamous difficulty bug.