Yes, that's by design. But remember, characters most often do wear armor, which absorbs damage. And additionally, the higher hit points at higher levels compensates heavily when you also include armor damage absorption. It behooves characters, therefore, to wear armor. I intend the system to be quasi-realistic. I want Heroism in my version of the Eltho to be a result of smart play, which means overcoming the odds by characters doing smart things. It is not intended to be a "Epic Heroic Fantasy" game. However, that said, I'm often impressed that given the rules the players more often than not have turned out to be Heroic - and that by playing smart and trying their best to give themselves the best odds they can, either by maneuvering, or equipping themselves intelligently, or conversely by taking risks for morally impressive reasons, and getting lucky. To me, risking defeat in the cause of good is what real Heroism is about. That's simply how I prefer my world. Other GMs will very definitely prefer different styles of play, and you can configure things as GM to suit your style as you see fit.

Another point you made mention of also pertains to the Armor Class is that it does not go up with levels like Attack Level which is based on Character Level. At first I had both going up with Level, but then found out that this was really too much boosting for Armor Class and would make the average number of melees for combat too many. Combats right now are calibrated so that they only should take a handful of melees for low level characters, maybe 4 or 5. The higher the level of the combatants, the longer the duration of the combat due to the increased amount of Hit Points that need to be whittled down. Increasing Armor Class with Character Level doubled the average number of melees and that was too much for my purposes so far as my world and GMing style is concerned. Again, GMs can adjust things to make combats last longer in various ways, if that is desired. You can also adjust combat to give your Player Characters 'A Heroic Advantage' very simply by affording them magical equipment more frequently than I do. That would certainly tilt the odds in their favor, if that's your GMing style. There are other ways as well, but that would be the simplest.

If, out of the box, your ODS is meant to be semi-realistic fantasy, then yes, no changes are needed. However, I think this brings up to other issues.

One issue is that a note should be made that this ODS is not initially geared for epic fantasy. People should know what they're getting. It's possible, as you've mentioned, to add skills, powers and items to make it epic though.

My second issue involves what I was originally thinking of when I made the initial post: Find a way to include the defender's weapon/shield/dodge skill as part of Armor Class. Granted, the system is currently simple, but potentially inaccurate from the perspective of story telling. Let me explain:

Let's say we have a 5th level mage and a 5th level fighter. Let's assume that their strength scores are the same and they have 15 hitpoints each. Neither is wearing armor, and they are fighting similar foes with melee weapons. The mage has spells and non-combat skills. The fighter has several combat skills. They are both getting hit by their similar foes. The fighter is no more likely to survive his wounds than the wizard. As far as dealing with damage received, they are equal.

In D&D, this is represented meaningfully by giving fighters more hitpoints per level. In other games, hitpoints never increase, but skills/talents/abilities cause the character to be hit less.

I'm not sure if this needs fixing, or if you'd want to fix it this way, but AC could be modified by the difference in a relevant weapon skill to the defender's DEX. So, if a player's weapon skill is 5 and his or her DEX is 3, the character's AC would increase by +2 when using that weapon as a defensive measure.

I'm sure that I'm not making myself clear, but I'm exhausted. I'll try editing this later.