Demons: There's no mention as to who's making Fragg's decisionsthe player or the GM. The GM runs the demons as NPCs. I might let players run their characters' demons most of the time just to make it all go faster.
Elsewhere, in the Demons in Combat section, it says that you have to go before your demon to tell it what to do. In fact, even if you go before your demon, you can't tell it what to do because it's already stated its intent by that time. Regardless of whether you go before your demon or after, it can't follow your order until next round.
Describing Actions: The rules make a point of rewarding stylish and cunning actions while punishing boring ones. But the stated actions at the start of the round (who's attacking whom) are utilitarian, not detailed. Ron says that you talk up your actions during the intentions phase to get the bonuses. It would have taken a lot of space to portray those intentions as detailed as they would be live.
I don't think I'd run it that way, though. I'd have players declare basic intentions and then, when their turns come up, I'd let them describe their actions in detail for bonuses. That change would make intentions go faster, would keep you from wasting time detailing actions that you wind up aborting later, and would let players riff off the circumstances current when they act rather than the circumstances at the beginning of the round. If you wind up giving someone a penalty on their actions, that can just translate as bonus dice on the opposed roll.
Which Stat: In the example, everyone's rolling Stamina for actions (and thus for initiative). Remember that no matter what stat you're using for your action, your roll counts as your initiative. Defending yourself against a magical attack works like defending yourself against a physical oneif you haven't taken your action yet, you have to abort it (or just roll 1 die for defense).
Fragg's Defense: When attacked, Fragg decides to roll 1 die for defense rather than abort its action. Fragg (or the person making the choice for Fragg) knows the attacker's roll when they make this decision. They see the thug's roll and realize that 1 die would probably be enough to avoid almost all the incoming damage. Knowing the strength of the incoming attack before deciding whether to defend yourself is a big deal, it's not the way most RPGs work, and it doesn't get mentioned here in the example of combat.
Fragg's Damage: When Fragg suffers 1 victory in damage, that's 2 penalties on its "next action," which is attacking Thug C. Since Fragg's already rolled for the attack, there's no practical way to subtract the two penalty dice. Instead, the defender should get two bonus dice (comparable to Fragg suffering a 2-dice penalty). The example of combat skips this detail.
Thug C's Defense: When Fragg attacks Thug C, the thug has to decide whether to defend himself. Since he's already rolled his attack, he can see that his own dice max out at 5 (on d10s). With a roll that bad, he knows that there's practically no point in attacking Fragg later in the round. (Since Fragg will already have acted, the Thug can't even get Fragg to abort his action or hope that Fragg will roll 1 die for defense.) Practically speaking, the thug should completely abort his action and he knows it. Apparently he sticks to his action and rolls 1 die for defense just so the reader can see how that works.