Zelek this is a good base "system" so far. Unfortunately the animations are incredibly important and the current animations in the models detract from the system. Even though the base system is good, the animations are stilted, which show the obvious "switching out of states" in the entities. But this of course is not as important as the fighting system itself.

Maybe when you are working on the A.I, you can add in more movement. Strafing left and right, backing up and advancing. Right now they are rockem sockem robots staying in place exchanging blows (like a japenese RPG). This movment adds a whole dimension to the sword fight, which can be seen in 3d fighting games where characters can sidestep (totally dodging an incoming attack other than jumping). So instead of just blocking the incoming slash, you can add a simple random to switch to different states:

1. AI sees player swinging his sword
2. AI chooses a random number between 1 and 100:

a.If the number is greater than 50, go to the blocking state
b.If the number is less than 50, go to the sidestep state

This simple setup can produce some pretty decent dynamics even though it is eventually predictable. Whats also cool about it is that you can plugin numbers that define the AI combat personality. For example you can plugin an AI to have a 60 "dodge rating". If the number is lesser than 60 then the AI dodges. Since there is a greater chance for the number to be less than 60 (out of 100), this makes the AI more defensive. Lower the 60 rating and the AI has more chances to choose higher than 60, making him a more offensive character.

I got sidetracked there, but more movement is needed. When you add this, a new avenue of strategy comes into play. Hitting the side of an enemy can produce more damage, attacking after a dodge reduces damage output, having a back to the wall prevents teaming up by multiple enemies, 2 handed weapons impair movement but inflict more damage etc etc.