Initiative has been a topic on Google+ this week, so I am chiming in. First, let me just say - this is my way, not THE way.
Rounds: I use classic AD&D rounds of 1 minute split into 10 segments of 6 seconds each.
Movement: Creatures can move their full movement per round (so a thief with a move of 12" can move 120', or 12' per segment). You can move faster than that, up to 200%, but if you do so things change a little. If you are moving up to 150% of your base movement you are 'rushing' and get no dexterity bonuses to A.C. Faster than 150% and you are 'charging' and get no dex or shield bonuses. When rushing you can turn no more than 90 degrees from your initial facing during movement and charging is, essentially, in a straight line. If you rush or charge directly at a target that can fight and has an unused attack it gets to attack you when you close, longest weapon strikes first. A rushing or charging character also may attack when they close, although they aren't required to.
Surprise: When an encounter occurs without warning every character rolls a d6 for surprise individually. The rolls is modified by dexterity, etc.Typically a character is surprised on a 1 or 2, although this can obviously vary. A surprised character gets no dex or shield bonuses to A.C. An unsurprised creature fighting a surprised creature can attack a surprised creature as if each segment of surprise were a full round, i.e., all of their normal melee or missile attacks. A segment or segments where all of one or both sides are surprised are resolved 'by themselves' and not as part of a larger round.
Here's the deal, though - it is still just 1 or 2 segments, so movement is still as above and spell casting still takes the normal amount of time.
Initiative: Each character rolls a d6 with modifiers for initiative. The resulting number is the first segment in which they can effectively attack/cast, so low 'wins'. A thief with a +2 reaction adjustment for a high dex would roll a d6-2 while a fighter with a -1 reaction adjustment for a low dex would roll a d6+1. For creatures that were surprised in a segment that is part of a round roll normally and then add the number of surprise segments they experienced. Maximum initiative is 10 and minimum initiative is 1.
Multiple Attacks: If you get 2 attacks per round the second attack is possible 3 segments after the first. If you have 3 or more attacks per round the additional attacks are possible 2 segments after the previous.
Example: a high level fighter with 2 attacks per round rolls a 3 initiative. On segment 3 he strikes a foe - his next attack will be possible on 6. If he had waited until segment 7 his next attack would have been possible in segment 10.
Exception- Fighters vs. Vermin: If the character is a fighter class that gets multiple attacks versus low HD monsters I do it this way - if the fighter is 5th level or below he rolls a d6: on 1-4 his initiative is 1, on 5-6 it is 2 and he gets an attack every other segment. At 6th-10th level his initiative is just flat-out 1 and he gets an attack per segment. I will post my 'fighters vs. vermin' rules one of these days. And they are going into Far Realms, too.
Spellcasting: The initiative rolls is the first segment in which you can start casting. If you are struck during casting one of two things happen: in my 1e campaign, the spell is disrupted. In my 2e campaign if you fail your Concentration roll your spell is disrupted. During the actual casting time the spellcaster does not get their dex bonus to A.C.!
Spell Holding: Because it is possible for targets to move or die during casting a spell caster has the option of 'holding casting' of a spell they have already begun casting. Effectively they keep the incantation/preparation going, delaying the completion of casting. A caster doing this cannot move more than about 3' every other segment and can have their spell disrupted as normal. Holding a spell can't be done for more than 2-3 rounds.
Dropping a Spell: At any time before completion a spellcaster can cease the spell. The spell is gone from their mind but not cast.
Missile Weapons: Initiative is the first segment that missile can be fired effectively. If a character with a bow, throwing knife, whatever states they are holding for a target the following things happen: 1) they lose dex bonuses; 2) they can only move at 1/4th normal speed; 3) they can fire at a target when they wish for the rest of the round; 4) if they don't fire they get an automatic initiative of 1 for the next round. You can only effectively hold a missile attack this way for about 5 rounds at a time.
General Combat Sequence Per Segment: 1) missile weapons are fired/hurled/held; 2) spell casting starts; 3) missile weapons hit; 4) movement; 5) melee; 6) spell casting ends. If an attacker with a held missile weapon fires 'out of sequence' the missile hits 2 steps later, i.e., if a shortbowman were holding a nocked arrow and saw a Hobgoblin shaman begin casting (step 2) they could fire in the next step (3, missile weapons hit) but the arrow wouldn't hit until 2 steps later (step 5, melee). Yes, a missile can be fired so that it strikes early in the next segment. Yes, if you time it badly you can have a target move out of the way during the movement portion of a segment.
Example: The intrepid adventurers have crept into a dungeon on the edge of civilization. After a few minor incidents with giant spiders and pit traps they have come to a door. Sessy the Thief carefully examines the portal but finds no traps and hears no odd noises beyond. She also determines the door is just swelled shut, not locked. The burly fighter, Eirik, draws back then smashes the door open. In the next room, however, are 4 Orcs silently reading books of poetry! The Orcs are just 10' away from the door, too.
Since neither group expected the other, everyone rolls surprise. Since I am a lazy jerk I roll once for the Orcs. Eirik rolls a 4, Sessy rolls a 2, modified to a 1 for her dex. Brother Reynaud rolls a 3 and Maury the Magnificent rolls a 2. The Orcs roll a 1. So the Orcs are surprised for 1 segment, Sessy is surprised for one segment, and Maury is surprised for 2 segments. Since one side is surprised and the other side has some unsurprised people the 'surprise segment' is resolved first and separately.
Surprise Segment: (the Orcs, Sessy and Maury are Surprised): Eirik has a movement rate of 6" due to his heavy armor so typically only moves 6' per segment. He decides to charge the surprised Orcs, picking the one to the right so he can keep his shield ready versus the rest. He strikes the Orc with his broadsword and does enough damage to drop him! At the same time Brother Reynaud walks forward to hold the doorway and protect his surprised friends.
Full Round #1, Segment 1 (Maury is Surprised): Everyone but Maury rolls initiative normally. Eirik rolls a 3, Sessy rolls a 1 (after modifiers), Brother Reynaud rolls a 6, and the Orcs roll a joint 4. Sessy holds a dart, waiting for a clear target (Brother Reynaud is in her way and she is squishy). One of the Orcs starts to close with Brother Reynaud and the other 2 do close with Eirik.
Segment 2: Maury rolls initiative getting a 5 (he rolled a 4 and adds one since he spent the first segment of the full round Surprised). The Orc closes with Brother Reynaud. The two Orcs on Eirik are jockeying for position, as is Eirik.
Segment 3: Now that the Orc is engaged with Brother Reynaud Sessy slips into the room past her friend - because of her movement exceeding 1/4th normal she is no longer holding her attack, but still has an attack action. Maury moves up into the doorway so he can see more clearly. Eirik strikes at the Orc to his right, wounding him.
Segment 4: Sessy throws a dart at the back of the Orc to Eirik's right, striking - and killing! - him. She draws another and looks for her next target. The orc attacking Eirik misses and the Orc attacking Brother Reynaud hits, doing 2 points of damage.
Segment 5: Maury starts casting Daunting Dart which has a casting time of 2. Sessy slips further into the room. Eirik and the other Orc are still engaged. Brother Reynaud strikes at the other Orc, but misses with his mace.
Segment 6: Sessy throws a dart at the Orc fighting Brother Reynaud, hitting him for 1 point. Maury's spell finishes and the Daunting Dart slays the orc fighting Eirik.
Segment 7: Realizing that he is now alone and surrounded the last Orc starts to edge to his left, trying to get his back into the corner. Brother Reynaud, however, shifts with him as Eirik closes. Sessy moves closer tot he middle of the room. Maury enters the room, finally.
Segment 8: Seeing the situation well in hand, Sessy covers the far door with a dart in case more Orcs come in (she has a missile attack left with her darts).
Segment 9: The increasingly desperate Orc is able to use a table to block Brother Reynaud just enough so that the Orc's back is to a wall as Eirik closes with him.
Segment 10: Snarling in defiance, the wounded Orc's situation is grim as the round ends.
Full Round #2 - Initiative: Eirik rolls a 3, Reynaud a 4,Maury a 1, and Sessy a modified 2. The Orc rolls a 2.
Segment 1: Sessy reaches the far door and begins checking it. Maury prepares spell components for a Magic Missile but does not start casting.
Segment 2: Sessy determines the far door is not locked. She bars it shut to prevent any more surprises. The Orc strikes at Brother Reynaud, but misses.
Segment 3: Eirik strikes the Orc for 6 points, killing it.
Combat ends after 14 segments.