I did some research and balancing exercises a little over a year back, before getting distracted by other things and putting Elemental aside for a bit.
My initial solution to better balance combat was to add 5 to the attack and 3 or 4 defense values of all units, before modifiers. My rationale for this number was simple. Str at that time provided a damage bonus equal to Str/2, after the first 10 STR, so the 5 would be 10 STR/2. Similar rationale for defense (Con/3)..
This was also coupled with toning down the attack values a bit on higher value weapons, as well as adjustments to monsters, armor, and such as needed. The result was less randomness in combat, and the least powerful units at least able to put up a better fight. This made combat more interesting, as one hit kills were less common under this model.
My next step would have been to increase this base value to higher levels and see how those worked. Based on the combat numbers I'm seeing now in E:FE, setting all base attack and defense values at around 10 ATT/ 8 Def looks about right to me, and perhaps I'll play with the .xml values at some point and see how this works
What I'm finding myself doing now in E:FE is centering my attack around the Champion(s) with uber weaponry, who goes out and slaps out as much as 100+ damage strikes at times against the enemy. This results in many one shot one kills obviously. Cinematic? Yes. Challenging? Not at all.
Of course, when the tables are turned, and that uber monster appears, the only solution is to leave, quickly if your levels aren't even close to his, but thanks to the escape spell this can usually be accomplished. No point in even trying to fight it out if said uber monster has hundreds of hit points to begin with, and your usual strike does 4 damage... Again, Cinematic? Yes. Challenging? Die horribly or run are your only options at this point, so I would not call that challenging, but instead very Monty Python-ish.
Against most opponents, combat should be an affair where you are jockeying for position, and each of your champions and units plays a significant role in that. Not line up and take a couple of hits, while Uber Champion clears the enemies one by one.
At least with spells, this taps on the mana pool, so if they are a little over the top there is the mana pool depletion mechanic to offset this. And spell costs and mana regeneration are things that are relatively easy to adjust for game balance purposes.
And basic Militia? Don't make me laugh. Glass cannons are all fine and good, but I'd rather be trading blows over multiple turns than watching mindless cannon fodder plink out 4 damage before being swept summarily off the field.
The early game seems to be balanced well enough. But as stronger weapons enter the field, the square/squareroot problem manifests itself, turning a valiant defense by villagers into an exercise in boredom.
Those are my thoughts on the current combat model.