Yes, 'squashed' is correct. x2mdl moves the head of each bone in the MDL to xyz=0 for the 'default pose'. So to align weapons/bracers, you have to do the same.
Your problem with the floating sword was probably from a bad bone structure in the arm. The weapon aligns to the 4th bone in the arm. If that bone is missing, the weapon kind of floats. Also, x2mdl seems to delete the #4 bone if it doesn't have a mesh attached so make sure to add a little triangle polygon to the weapon bone so it doesn't get deleted.
Your problem with the floating sword was probably from a bad bone structure in the arm. The weapon aligns to the 4th bone in the arm. If that bone is missing, the weapon kind of floats. Also, x2mdl seems to delete the #4 bone if it doesn't have a mesh attached so make sure to add a little triangle polygon to the weapon bone so it doesn't get deleted.