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On my current game, I'm playing Diedra's eco-nut faction on the second to lowest difficulty level.

I've built my military of nearly entirely mind worms, and with them I've destroyed one faction without batting an eye and nearly destroyed another faction (in fact, the Spartans) with little problem, until Santiago unconditionally surrendered.

When, where, or at what point do mind worms become inferior to conventional military units? Is it merely at this low difficulty that the AI tends not to build enough morale-enhancing buildings in their bases, thus making their units very vulnerable to mind worms?
On the lowest difficulty level you get a big bonus for any kind of combat, so you can typically just walk right over any AI opponent even if your forces are a bit behind your opponent's in terms of technology level. On higher difficulty levels, where things are equalized a bit more, Mind Worms and PSI combat can be the great equalizer, as it all comes down to unit level (hardened, veteran, elite, etc) and unit moral, so if you really stat up the buildings and secret projects to increase moral and your opponent doesn't you can still trash their forces pretty good, although you'll still take some losses attacking their cities (due to defensive bonuses).
Space elevator + drop anything = gg AI opponents

although you can't drop mindworms
If my memory isn't completely off, some of the things added in the expansion made Mind Worm forces much less easy-mode, especially vs the Alien factions.
Yeah, a lot more psi-combat stuff. Enhancements, bonuses etc.
In my general experience, at least in the higher difficulties, mind worms tend to lose their effectiveness once people start upgrading to the higher power reactors. At which point if you want to keep doing psi-combat you would need to engineer yourself something like a speeder with a fusion reactor/singularity etc, and psi for its attack value.
Increase the moral of your troops to defend against them. They are not a threat at lower difficulty and i think the fauna is useless without the expansion.
If you promote your worms up to mature/demon boil status when attacking they are a match for most any unit in the game when attacking--not so much for defending.

Fortunately the AI opponents do not systematically promote their worms.
They're effective at the lower level of difficulty, but when you start playing at librarian, the AI actually builds defenders with PSI defense, rendering them somewhat less useful. Even with Deirdre, it becomes important to build regular troops and tanks that can wipe the floor with the PSI defenders.
Mind Worms are slow, their lifecycle bonuses are harder to attain than morale bonuses are*, and needlejets especially tend to have them outgunned (attacker gets +50% in psi combat, and you can't hit back because worms aren't SAM). I'd say native psi units are an advantage in the beginning and end of the game, but can leave you pretty stranded unless you're able to take the initiative and work your way into a position where you're capable of compensating.

* Conventional armies get +2 morale at E1 (Command Center), +50% psi defense ability at D2 (Hypnotic Trance), +1 morale at E3 (High Morale) and +50% psi attack ability at E3 (Empath Song) by the third tech layer (remember, alien life forms can't use Abilities!). By that time, natives can get +1 lifecycle (Biology Lab). Deirdre gets +1 Planet, of course, so that evens it out some**, but the trend continues, and if you don't manage to get the relevant projects done in time, you can have a hard time catching up -- and even if you do, Command Center + Bioenhancement Center (+4 Ground) costs only about half as much as Biology Lab + Centauri Preserve + Bioenhancement Center (+3 lifecycle), so conventionals can more easily be produced en masse.

**With Green economics, you get another +2, but bear in mind that Fundamentalist also confers +1 morale, not to mention the +2 that Santiago starts with and Miriam with +25% to attack.

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If you think one particular faction is overpowered, it's probably because it sits well with the way you like to play the game. So don't play Deirdre because Mind Worms are broken; play Deirdre because it's the most fun! ;)
When the AI starts developing the more advanced reactors, mind worms lose a lot of their effectiveness because the reactors add health to military units (up to 40 points), whereas the mindworms are capped at 10. In the early game, though, mind worms are a great equalizer if your opponent has better tech than you do. Units with the "trance" upgrade also do very well at defending against mindworms (I believe there is an attack upgrade as well).
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Phalmy: (remember, alien life forms can't use Abilities!)
Exactly, one consequence of which is you can't give them Clean Reactors. I don't know if everyone else uses Clean Reactor as much as I do. I generally try and switch most of my units to Clean and then run Democratic politics for the rest of the game.

Except when I play the Planet Cult in Alien Crossfire. Throw them into the Pit!
Mind worms are brilliant for early game exploring and exploring enemy territory and killing weak targets. It is quite easy to get a large number of 'Independant' mind worm units, which means they do not require any support.

ocean worms are in my opinion the best units in the game! You can capture independant boils and use them to capture more independant boils, basically building a powerful navy completely free of cost and support which you can use to dominate the seas, invade other lands, transport spies to steal technology and claim pods! The only catch is that you do really need to be willing to reload a fair bit otherwise your boil navy is just going to stagnate rather than expand much, you know, two steps forward, two steps back etc etc.
Mind worms IGNORE reactors, so they are good against technologically advanced foes (unless they have psi bonuses). Powerful artillery is very effective at weakening mind worms.
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Phalmy: (remember, alien life forms can't use Abilities!)
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zorkmids: Exactly, one consequence of which is you can't give them Clean Reactors. I don't know if everyone else uses Clean Reactor as much as I do. I generally try and switch most of my units to Clean and then run Democratic politics for the rest of the game.

Except when I play the Planet Cult in Alien Crossfire. Throw them into the Pit!
Any native life form that finishes its turn in fungus requires no support that turn. That undocumented feature helps to maintain a large army of worms, IoDs, etc.