Here's a question for you: why not give longer weapons some advantage in attacking first? Presently, if I understand your rules correctly, the guy with the dagger is likely to hit the guy with the greatsword first, due to d20 init for dagger vs d16 init for greatsword. However, I see approaching an opponent armed with a longer weapon as being difficult without being hit first. I understand that swinging the weapon is more cumbersome, but those 3-4 feet that you need to cross that the greatswod can reach, before your own dagger can reach your opponent, seem pretty intimidating to me. Perhaps people with a lot of experience in fencing might comment on this.
For example, you could have the first strike of round 1 be to the advantage of the longer weapon wielder.
I remember an interesting rule in Middle Earth RPG, where ranged attackers with loaded weapons went first in combat (init amongst themselves); and then the melee attackers went second (init amongst themselves). I liked that rule for "realism" purposes. Charging someone with a crossbow meant you took the hit for sure before getting to him, which makes sense.
Maybe something similar could be done in this case. If the dagger wielder charges the great sword wielder, the great sword wielder goes first on round 1; and then on rounds 2 and subsequently, init is rolled as usual with d16 for great sword wielder and d20 for dagger.
This brings me to the longsword. The rules state that it uses d16 when used two-handed. However, for having done some LARP with good quality foam weapons, wielding a sword 2 handed allowed me to be much quicker than using it one handed (I used a "bastard sword" quite a bit, a bit longer than the long sword and with a hilt that accommodated 2 hands). The ONLY reason I'd wield a weapon one handed is to use a shield, or if my other arm was injured, for I was much more deft with it 2 handed.
This brings me to the question: does a person wielding say, a mace or a longsword, one handed, move his weapon more slowly than a person wielding a greatsword 2-handed? In my opinion and with my limited LARP experience, no. Getting to use both hands provides leverage on the handle of the greatsword, and it's much easier to move it quickly in an arc, than it is to move a long sword one-handed, even if the weapon is bigger. Now we might get into the question of how to move a weapon, i.e. swinging vs piercing... But lets not
My main point is: I doubt that the greatsword is so slow, compared to many one-handed weapons, because you get your second arm to move it quicker.
This is even more true for the staff. The great advantage of the staff IMO is how quickly you can attack with it, leveraging it to swing it or darting it in.
My take on a rule for weapons, would probably be to
1) split the round into two parts, where ranged attackers with readied weapons go first - those that draw their weapons immediately drop to the second portion of the round; and melee attackers go in the second part. You can exceptionally up or down creatures in the two-part round depending on certain circumstances.
2) I'd probably give automatic win to init to anyone with a longer or a reach weapon on the first round of combat. I would not use the d16 for subsequent rounds because I'm far from convinced that wielding a long sword two handed, or even a greatsword, is slower than a long sword one-handed or another one handed weapon.
3) I'd consider giving a bonus to hit to someone wielding a small weapon such as a dagger, or a weapon that is very quick to wield such as a staff, to represent that one can attempt to hit with these weapons more often than with a larger weapon. For example, perhaps a d24 to hit with dagger and staff and other selected weapons (only a crit on 24? To be considered.)
On another topic: the flail is indicated as doing 1d12 damage and is not indicated as being a 2-handed weapon. It reduces the DR by 3 and negates shield defense. This seems like a very good, even considering the -1 to defense. Mechanically, I'd rethink the balance of this one. I think it should be a one-handed weapon that does 1d8 or the like.
Another topic: the DR reduction by weapons appears circumstantial depending on what armor you're facing (as noted by cjeopar). I understand that you're using the "blunt = DR" basic principle. This appears consistent.
However, is a hand axe really that much better than a long sword or great sword against an opponent in plate or full plate? Or even against an opponent in leather armor? The two swords are going to hit pretty hard also, but they have the additional possiblity of being used to slice or cut or pierce in addition to the blunt force of impact. I think a very reasonable argument could be made that, on average, the long sword will probably be more effective against most types of armor than the hand axe (although I do not know, really).
The AC bonus for weapons. While I agree that wielding a weapon is a great defense in melee, it is worthless for ranged attacks. Do your rules address this?
Why is the flail worth -1 AC, the arbalest 0 AC? (the arbalest appears more cumbersome to me)
The hand axe +1 AC, the hammer 0 AC? (Don't see a diff.)