(breaking up all the combat parts into smaller sections to preserve my sanity - also, I had intended to do character advancement at some point shortly, but I think I'll hold off on that until after I get the bulk of combat out of the way)
A combat round is six seconds long.
Initiative is determined as follows:
1) Actions are declared.
2) Everyone rolls one die, and adds their DEX modifier. This may be further modified by certain environmental factors (see below). Higher is better.
3) Characters move, in reverse order of Initiative. After everyone moves, characters may alter their facing, in the same order.
4) Melee and missile attacks are determined, highest Initiative going first.
5) If a character has more than one attack per round, they occur now. If more than one character is doing this, use the same Initiative order.
6) Spell effects go off.
A few modifiers for determining Initiative:
Attacking from higher ground gives a +1 modifier (melee attacks only). Usually this indicates terrain, but attacking someone on foot from horseback also qualifies.
Attacking with a weapon that was not ready in hand gives a -2 penalty. This includes firing a bow or crossbow the same round the arrow/bolt is drawn. If the weapon is a dagger, the penalty is only -1.
Many weapons have a -1 penalty if it had been used to attack the previous round. This usually includes hafted weapons, and is noted on the weapons table.
Anyone stunned during the previous round suffers a -1 penalty.
Slippery or uneven footing gives a -2 penalty.
If the character is somehow physically hindered (trying to climb a wall, wading through deep water, covered in jungle vines, etc), they receive a -4 penalty.
Someone crouching or kneeling suffers a -1 penalty in melee combat. Someone lying prone suffers a -3 penalty, and also cannot attempt most missile attacks (except for using the crossbow, which suffers no penalty for this).
Actions occurring during the same Initiative score are considered to be simultaneous.
Characters can take a Fast Reflexes talent to add to their Initiative score.
Held Actions - A character can 'hold' or delay an action, and then trigger that action at a later time. This includes holding an action from a previous round. The held action can be triggered at pretty much any time, including during an opponent's movement phase.
Free Attacks - When a character is closing into melee range against an opponent, if one of the combatants has a weapon with a significant reach advantage compared to their opponent (i.e. sword vs dagger, spear vs sword), that characters gets a free attack, in addition to any other attacks they may receive that round. This is determined during the movement phase. This also applies to those who try to run past enemy characters without engaging them.
Example: Ralph the would-be hero is facing a necromancer, who has a half-dozen spear-wielding skeletons in front of him for protection. Ralph wins the Initiative, and tries to charge through the skeletons to get to the necromancer, so as to kill him as quickly as possible. All of the skeletons who are within spear range of Ralph's path of movement get a free attack against him; the GM rules that four of the six can do so. Unless Ralph gets lucky, he may well soon be joining the undead skeleton brigade.