Played the first scenario last night and an interesting situation came up, just want to see if you all think we resolved this correctly.

Ok, Odious had been defeated so he was in the Nemesis lair. We hit the second peril mark to resolve (the blue one). Our party leader is already engaged with 3 enemies and has the highest HP left. Here is what we did:

Odious spawned but could not be placed in front of the leader, so he was dealt 2 damage and placed face up in the shadows. He then activated and hit the leader with inflict for 2 more damage. The leader still has the highest HP at this point so when Odious tries to "prey" he cannot (cause the leader still has 3 enemies engaged), so he does yet another 2 points of damage.

Sound right to you all?

Hmmm...correct and incorrect.

The only misstep is that Prey actually targets the hero with the most wounds, not the hero with the most HP left. Health and wounds are two different things. When your wounds are equal to or more than your health value, your character is defeated (RRG pg. 15; under wounds). So prey directs you to engage with the character with the most wounds (blood drop icons). The thematic idea is that the character is preying on the hero that is most weakened, hoping to get an easy kill. Also, in the case of two heroes having an equal amount of wounds the players are free to choose which of those heros the enemy engages with (RRG pg. 2; it's the last of the golden rules).

So you were correct that Odious should engage the party leader first. Since the party leader's engagement zone was already full Odious deals his damage and returns to the shadow zone face-up. Then his activation begins so he would start by hitting the party leader again for 2 damage. However, at that point prey would have him engage with the hero with the highest amount of wounds. I can't be certain but it sounds like that was not the party leader in your case.

OMG how did I read that wrong - so stupid.

That one seems to have thrown a lot of people. It's come up a couple times over on the bgg forums.