The only problem I have with difficulty settigs on some games is that they don't seem to scale with friendly AI.
Some sports games (NFL / NBA) the computer will become unstopable but your own computer controlled friendlies are still moronic. Same goes with some shooters and upping the difficulty means that the enemy becomes inhumanly accurate and aware while your own squad mates seem to remain the same.
I did like the difficuly settings of 'Operation Flashpoint: Dragon Rising' - instead of making the AI harder / better / more accurate etc it simply removed more and more of the HUD (and reducing save points) meaning that the player had to be more aware of the surroundings etc.
Shame the AI on that game was already pants on head retarded