I'm in the third area now, the one after the palace; I've really enjoyed getting here.
However now I've run into a bunch of thugs trying to burn an elven woman alive inside her house and finding it impossible to win. :-(
This is the first I'm it's really been frustrating.... In part because the game depends HUGELY on the level based system and my guy is under leveled.

I've had to redo this battle a lot, in part because my guy is only level 4; there's indications he's supposed to be level 5-7 right now.
From what I've seen, it's not possible for me to get him to 5 before coming here because I've not found near enough quests to get to level five in that first area. :-(

Now, in this first REALLY difficult battle, I find the control lag to be a glaring problem.
Half the time I hit a button during this combat, it doesn't even do anything, the other half the time, it comes up a second or two too late to be of real help.
IN any game that requires precise timing and movement, this is a huge fucking problem! :-O
It reminds me of that other Witcher game, before the fixes.

Settings are already only on medium and fps limited to 30 to prevent my graphics card heating up too much. >.>

No, it doesn't. At least - not to the extend Witcher 2 did. Here I can defeat enemies over 5 levels above me just fine. All you need to do is have a good gear, good signs management and good fighting methodology. Question marks on a map. Go to them. There's no control lag. Simply action needs to be completed before another one can be taken - eg. you can't roll backwards while in a middle of swinging your sword at the enemy. It's still nowhere near the level of Daemon Souls, so don't complain. L2P? It's really nowhere near as bad as you describe. You must be doing something very wrong if your character doesn't respond to key presses half the time. You're probably blindly mash buttons in a hope it will work. It won't.

Are you using a controller? I've read that some people experience input lag on controller. I'm using a keyboard and haven't had input problems.

Wow, nothing worth hearing from you.
Next time try thinking before responding, instead of making a bunch of assumptions.

The one thing I will say, is that I did every single question mark.
Combat seems to be netting NO xp; only quests. No, actually just using keyboard and mouse.
The only thing I can figure is that my graphics card (a gtx680) is chugging at certain points or something.

The main thing that fails to function, is usually when I try to open quick menu.
Go figure >.>

There's definitely input lag. I see it in and out of combat. I even tried reducing settings from ultra all the way to medium to see if it was a framerate issue, but no luck. Part of the problem is that button presses seem to occasionally be missed, so nothing happens when you press them. Actually I think it's both issues: missed keystrokes/button presses AND input lag.

I don't really feel like combat is very difficult on Bloody, and IMO most of the difficulty in the game is from fighting a terrible control scheme. Are you playing with a controller? These may be just more issues with the kb/mouse implementation.

Thank you for verifying it. :-)

Does it still happen for you after 1.03?

Bummer.
I still have it with the quick menu key.
However, after turning my graphics down a bunch, the other ones stopped doing it.

Could not have said it better!
Myself have no problems with lag i play with K/M and doing fine.

No, I play on mouse and keyboard. Around 40 FPS.

When fighting humans or beasts. I find it useful to hold up the block key instead of dodging and using quick strikes once they's done hitting me.