Combat is very important, but sadly, the battle system is very rough. Targeting enemies is accomplished by pressing the Y button, and switching targets is done with X. This set up is all fine and good, but it would be much easier if the game followed suit with other action titles and used one of the shoulder buttons for targeting. Combat with other enemies is quite bothersome as there is no way to block an incoming attack. To win, all you can do is hack away at the enemy and hope you kill him before it kills you. Bilbo moves slower in combat than out of combat, which makes it difficult to evade an incoming attack. The game also throws way too many enemies into combat at once, so taking the upper hand is also very difficult.
The Hobbit is looking mediocre, but hopefully some (or all) of these problems will be addressed by release.