you should probably test morale at the start of combat, after the combatant receives anything but a minor wound or is stunned, and then if their compatriots begin dropping or fleeing
I use the GunMaster Gold combat skill of Morale to test the resolve of a combatant to face their opponent. One roll prior to combat's immediate start, then every time a significant wound - serious or better - is scored or when the combat odds regarding number of opponents changes (eg an ally drops in battle, or another ally appears to assist)... Marginal Failure means the combatant will try to flee at first practical opportunity; Critical Failure means an immediate disengagement and route. Morale is affected by wound EML penalties and the outnumbering modifier, but not by fatigue, nor encumbrance, in the way I run things.
I use the HM1 version of Initiative (sum of End, Dex, Agl, Spd, Wil), but with a house rule of the addition of a d10 roll each round of combat. This Initiative value is subject to physical penalty in my games, and reflects who gets first strike in the combat round; or "declares their combat option last, but takes their action first"... If one combatant's current Initiative rating is MORE than double that of the opponent's, I allow a second attack in that round against the same opponent provided a one vs one fight, and that the extra attack occurs AFTER the opponent's attack opportunity; this second attack is treated as if a Tactical Advantage were scored (see below), and is defended at half EML of whatever defense the opponent chooses to muster.
I use the HM1 damage tables, and treat shock rolls as exactly what the term entails - the person is in shock (not necessarily unconscious, but clammy skin, racing heartbeat, blood pressure problems, etc) and is effectively unable to defend further attacks. Usually in the next round I will have a healing roll for the shock be attempted; if this one fails, the person in shock faints into unconsciousness in addition to the other symptoms of the condition. If the healing roll succeeds, the person recovers enough wits to try to flee the scene to a place of apparent safety, and is able to defend at HALF EML en route. If this safety cannot be reached in one round, each subsequent round forces another roll to see if the person faints and falls to the ground, or manages to continue.
Incidentally, for shock rolls, I use a "Stamina" attribute rating (I mentioned it elsewhere in the forum), which is a combination of Str, End, and Wil, and can be raised (in decimal point increments) through the use of the Condition skill from GunMaster Gold. This allows for the notion that a person may actually "train" to be more resilient in battle conditions, and that it involves complete physical power (the Str & End) as well as a component of willpower (Wil) to stay conscious. I also use this Stamina rating for encumbrance and fatigue rate calculation, although fatigue recover utilizes End alone.
Physical Penalty applies to all combat skill EMLs, Initiative, and Mobility, as well as any physical skill uses and lore/craft skills that have a physical attribute in their SB calculation, as well as against all spell casting (including religious ritual invocations) and psionics. Pretty much everything else is unaffected. Endurance Index penalty applies to shock rolls.
With regard to wound effects, I apply the HM1 table pretty much directly as it is. I have wounds from slash, pierce, and such attacks that are under the 5 required on the table to have still overcome the armor (if the armor wasn't breached, there would be no net damage, in my logic), but these wounds are such that they are minor without any other consequence. In other words, the only reason for the 5+ notation is that at these levels special conditions may happen at various hit locations.
To contend with the multiple damage results that may have no effect otherwise, I apply a sort of "maximum damage to the body" rating, using the Condition skill ML as the threshold. Once the total damage from wounds exceeds this amount (not fatigue or encumbrance), the body automatically begins to go into shock with immediate, and every minute thereafter, required shock rolls beginning at "e3" until the person faints or begins to receive treatment for their wounds. (Once the treatment process begins, these rolls are stopped.) The basis for this is that all wounds result in "blood loss", although the ones with special BP loss according to the chart are those that are the spurting kind from arteries, or the free flow from major veins. Multiple small wounds can also result in equivalent loss of blood, although it would be scarcely noticed until the person feels faint - which is what this house rule takes into account.
For damage rolls, I use a change in base die to be rolled according to strength and size of the attacker. If their Stamina is higher than their strength, I use that instead. (Another reason for special training.) [I forget which article I read that inspired this, but it answered my question of how greater than usual strength should have a direct impact on combat.] This is in addition to the increased base damage for heavier weapons wieldable by stronger individuals...
The only other big combat rule I adjusted was the number of Tactical Advantages in a person's TURN of a round that they could have - up to 2 from the usual maximum of 1. The exploitation of the first TA is defended against at half defense EML; if this results in a second TA, the exploitation of this second one is defended against only with Ignore. The assumption is based on how "out of position" the defender is to mount an effective response. The upshot of this is that it is best to learn the best defense against a particular kind of attack, and not just choose block or dodge each time...
Most everything else in relation to combat is by the book HM1 in my way of running things, especially the wound healing system and other kinds of damage/injury conditions - poison, disease, infection, etc... With the exception that any wound treatment that calls for "surgery" isn't addressed with the usual Physician roll, but the Surgery skill from GMG; no surgery if the wound calls for it is "no treatment" for effect...
Combat in my HM games is usually a bloody affair not to be undertaken lightly. As I have mentioned elsewhere, to play in my HM games as if in a D&D game will get you killed really fast...
ps - also note that if the character is overweight, the amount of pounds that the character has beyond what is proper for their frame and height is placed directly against weight carried, and therefore counts into encumbrance and fatigue rate... (This was inspired by my own realization that being a sort of "fatty" myself in real life, that I am not as quick as others more fit than me...)