Shelia Tushingham, of Northern Road, Slough, Berkshire, told the court she had seen Kauser Jafri, 21, carry the sword into his house.
'I hadn't seen anything like it, only on television. I thought it was something you would put on the mantlepiece or cut the grass with,' she said.
Mr Jafri, his brother Moddessir, 24, and father Majid Syed, 60, deny murdering Khalid Dad, 22, of Slough, in May last year. Mr Dad had been gagged, beaten, and his head was severed by a single blow.
Mrs Tushingham drew a picture of the sword for the court. She agreed that although the brothers' house had been vandalised several times, they had never threatened anybody with the sword or another instrument. 'They always called the police,' she said.
Amanda Maguire, who shared a house with the brothers, told the court the brothers had not returned home on 19 May. The next day she saw Moddessir Jafri putting a black dustbin liner in the boot of his car. 'It didn't look heavy, just bulky,' she said.
Mr Dad's head was found in a black plastic bag in the gutter of Waterbeach Road, Slough, on 21 May 1991.
His body was found half a mile away wrapped in a bedspread in a school driveway.
Ann Howley, Majid Syed's neighbour, said that although Mr Syed regularly had bonfires in his garden she had not seen one on 20 May. 'There might have been a smouldering one, but I would not have even seen that as the hedge was in the way,' she said.
The prosecution alleges that Mr Syed had burnt blood-stained foam from his sofa and a rubber mat from his son's car in the garden.
The trial continues today.