by Anduin
Basically, the owner of the units chooses which unit to damage. He can choose units in the same initiative but also some in later or earlier rows - only limitation: they have to be standing!Thats why its nice to have a big hexagon unit with you, because it can suck up a lot of damage!
However, there is the rule garrett mentioned: Already wounded units have to be chosen first. So if you assign 1 damage to your big hexagon unit, it has to eat up damage until its dead.
As for the initiative of neutral units: Yes, thats the number next to them. Its NOT their "physical" row on the sheet, since some neutral units have the same initiative (but are physically in different rows)