I've heard the AI isn't that good..how challenging is the game?

Always play against the AI on Hard. From there you can let them get bonus resources which helps a lot actually. The AI can be bothersome in the beginning but once you get decent enough weaponry and a large enough production base they tend to all crumple beneath your mighty fleet. If you give them bonus resources they can keep up with you longer and that makes for a more interesting match.

Overall this is a good game. I still play it every now and then. SE5 is also good but I can only run that on my WinXP PC.