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Does defense modify the chance for an enemy to hit your character? Or does it decrease your characters damage threshold? I was going to put most of my points there for my warrior guy but not sure.
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valdaintheking: Does defense modify the chance for an enemy to hit your character?
Yes.
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valdaintheking: Or does it decrease your characters damage threshold?
No.

Defense is only concerned with the chance to hit. It counters Attack.

Damage is countered by Resistances/Protection (same concept, just different ways of expressing it).
Here are all the attributes described: http://pctalk.info/Games/Sacred2/Wolfes.Lair/SacredUnderworld/Pages/GameBasics-Attributes.html

I recommend not to put any points into dexterity, usually it is the best to put all or almost all points into physical or mental regeneration, because they decrease the regeneration time of your moves or spells.