It almost seemed like you were "thinking out loud", during some of it.
Yeah, I ramble a lot, and come up with stuff as I go. It makes the posts really long, of course, especially if they include math (like this one will).
The most important of which is that piercing weapons halve AC as damage reduction. That includes arrows. But piecing weapons cannot be used to power attack, lacking the prerequisite swing of a bludgeon or slashing weapon to build up momentum.
Good change, and it solves the archer issue, although you'd have to have a special setup for the multi-type weapons (a halberd is both slashing and piercing; do you force the player to declare which way he's using it when he attacks? Actually, that's not a bad idea. If he pokes with it, he gets DR penetration but can't Power Attack.)
It also makes spears a good weapon again.
This is because shields offer a much greater bonus to EC than the printed version of AC (about twice as much in most cases).
Good, D&D shields are just dinky.
Moreover, light weapons gain a +4 on parry rolls, single-handed weapons gain no bonus, and two-handed weapons take a -4 penalty on parry rolls.
You're giving a lot of bonuses to small weapons. Suggestion? Make light weapons always do 1/2 STR bonus, like an offhand weapon did before. That'll make up for the parry bonus. Also, have the Enhancement bonus to armor AC not be halved, since it'll be directly opposing the enhancement on the weapon. (Enhancement for weapons costs twice as much as for armor, and always gives +1 damage and +1 attack, so armor and shield enhancement should always give their +1 AC or EC, respectively). So, +4 Full Plate would be +12 AC normally, +8 against piercing weapons.
Alternately: give everyone Weapon Finesse, but require it. That is, if you pick up a dagger it'll always use your DEX to attack, even if your STR bonus is higher, because it's just not the sort of weapon that can power through defenses. Since these weapons tend to be piercing, it's not really a nerf.
Also, with those numbers it sounds just like the disarm/grapple rules, with +4 per size category difference. You could just have "parry" be a subset of the disarm rules or vice versa, which'd tie it into the existing feats pretty well.
You have to want more than simply... roll dice, beat AC, roll damage. You have to want a lot more tension in your combat for a little extra time (which quickly diminishes, in my experience, once the learning curve is over).
Sure, as long as a character concept that was useful before doesn't become totally irrelevant, a bit of complexity is a good thing.
Back when 3E first came out I wished they would have gone to more of a GURPS-style system with both avoidance and mitigation built into it; in D&D, DR is rare and almost always the result of magic. If DR was more common, to where everyone had at least a LITTLE, it'd add a lot more strategy to combat, without greatly increasing the time needed. That's why I agree with the basic concept of your system, it's just that I think the nuts and bolts need a bit of tweaking.
Except that the fighter and their good BAB hasn't made their parry roll yet, which can easily negate the bad BAB attack in the first place.
But he could parry a non-Sneak Attack roll just as easily, right? I'm not talking about whether offensive abilities are overpowered under your system, since clearly you've inserted more defensive options into the system. The issue I'm trying to bring up is that people depending on high-damage abilities like Sneak Attack will be stronger relative to a "normal" attack than they were in 3E, simply because these extras will kick in more often, regardless of AC, and AC won't really help against Sneak Attack (since your AC will basically be "used up" absorbing the base weapon damage).
Except that the Max Dexterity Bonus for armor also limits their BAB Dexterity bonus.
I wasn't mentioning Max DEX in this one. My point was that if I have a class that averages 10-15 damage per hit and hits ~50% of the time, I won't see any substantial change in damage output.
But that brings up another point: why bother with heavy armor now? As it was, in 3E there wasn't much reason to wear heavy armors, and you've made it even less desirable. It limits your attack bonus, it limits your EC, and the little bit of extra DR can be bypassed with piercing weapons, Sneak Attack, and Power Attack.
I presume you mean AC as damage reduction? If so, that is how it works now, so I'm not sure of your point here. You subtract your AC as damage reduction value from the damage you are dealt. Same thing really.
No, that's not what I meant. What I was trying to say:
OLD WAY:
1> Total the physical damage (weapon damage + enhancement + STR + Sneak Attack + Power Attack + Favored Enemy + critical hits)
2> Subtract AC, to a minimum of zero.
3> If the result is greater than zero, the nondamaging effects (poison and disease) kick in.
4> Nonphysical damage sources (Flaming) are treated separately, opposed by elemental resists.
This is how 3E works (with the caveat that the "AC" (DR) in step 2 is practically nonexistent for most targets), and I didn't see anything in your post that changed this.
MY SUGGESTED WAY:
1> Total the "base" physical damage (weapon damage + enhancement + STR).
2> Subtract AC, to a minimum of zero.
3> If the result is greater than zero, the "extra" physical damage (Sneak Attack + Power Attack + Favored Enemy + critical hits) and nondamaging effects (poison and disease) kick in.
4> Nonphysical damage sources (Flaming) are treated separately, opposed by elemental resists.
See the difference? All those extra damage sources were moved from #1 to #3, so you can't deal Sneak Attack damage unless the dagger would have penetrated the armor/DR in its own right. It makes sense for Sneak Attack and Favored Enemy (can't hit the vulnerable spot if your weapon can't penetrate), and for Power Attack... well, it keeps it from being too powerful, I'm sure you can come up with a flavor reason.
There, instant reason to have heavy armor again. It's like the Fortification ability; Full Plate may only stop 3 points more damage than a Breastplate (piddly at high level), but it also REALLY cuts down on the number of critical hits and sneak attacks you'll take.
Example:
All nonmagical. Attacker has a longsword, STR 14. Defender A is in full plate (AC 8), Defender B is in a breastplate (AC 5). Defender C is in a robe (AC 0). The attacker hits in all three cases (yes, I know he'll be more likely to miss C than A).
Without a crit it'd just be a straightforward "AC of X reduces by X points" for both methods:
A takes (1d8+2)-8 damage (only taking damage on 25% of attacks, for an average of 0.375 points)
B takes (1d8+2)-5 damage (only taking damage on 62.5% of attacks, for an average of 1.875 points)
C takes (1d8+2)-0 damage (always taking damage, for an average of 6.5 points)
Under your system, the plate-clad guy is nearly invulnerable to this sort of attack, while the robe-wearing guy gets sliced and diced easily. The relative ratio is 1

huge.
With your 1/2AC penetrating rule, a rapier would do much better against A (1d6+2-4 doing 1.375 damage on average) and slightly worse against C (average 5.5 points). All of these trends I can agree with.
Now let's pretend he gets a critical hit (x2 damage, adding another 1d8+2 damage, which is about the same as +2d6 Sneak Attack); the two methods diverge:
OLD WAY:
A takes (2d8+4)-8 damage (median 5 points, almost always taking damage.)
B takes (2d8+4)-5 damage (average 8 points, always taking damage)
C takes 2d8+4 damage (average 13 points, always taking damage)
The difference in ACs becomes really minor, since it's only applied once. You could fix this by doubling/tripling AC on crits (that is, it's subtracted from each instance of the base weapon damage), I suppose, but that doesn't help for Sneak Attacks or any of the other things I mentioned.
MY WAY:
A only takes damage if (1d8+2)-8 > 0 (25% of the time), and if he does then he takes an average of 5 points of damage. Net: 1.25 damage per hit (median, not mean).
B takes damage if (1d8+2)-5 > 0 (62.5% of the time), and if he does then he takes an average of 8 points. Net: 5 damage per hit.
C will always take damage, an average of 13 points per hit.
The higher AC had an impact beyond just the straight +X points of damage reduction, which really helps make up for the inherent problems of heavy armor. And, the relative damage ratios between A, B, and C are a lot closer to what it is on non-critical hits.
Again, it's not just an occasional thing involving Sneak Attack or crits, I could do the same math with the 2-for-1 Power Attack in 3.5E.