Here's the deal; to start, you pick a kingdom, large or small, empire or vassal. There are tons to choose from, everything from France to Trebizond, and each kingdom starts with its own relations with surrounding kingdoms, be they friend or foe. You can declare war on the punks to teach them a lesson, or you can offer your friends deals, like trade agreements or royal weddings.
If (and when) you go to war, your relationship with other kingdoms change. Kingdoms who hate your enemy will like you more when you go to war with them, and then you can start trading and so forth. But kingdoms that are friends with your enemy may break their agreements with you, or even declare war.
There is so much to deal with regarding diplomatic relations that it would be overwhelming if not for the lovely interface and map that shows you who likes you and who doesn't, what your relationships are and who you are at war with, all at once. Its very intuitive and very clever.
My favorite part of the game is the knights bar, which is a bar at the top of the screen where you can hire merchants to trade with other kingdoms, marshals to lead your army, clerics to convert provinces, spies to conduct espionage, and more. The other knights you can hire I find to be pretty useless, all they really do is up your building speed and generate food faster.
When looking at the diplomatic view, all the kingdoms are laid out neatly with corresponding names and colors designating boundaries and such, much like a map. You can then zoom in to get a view of your actual provinces, with the central town and surrounding countryside, and you can build town improvements and order around your armies to plunder enemy villages, attack enemy armies, or lay siege to enemy towns.
The computer can handle battles without going into RTS mode, but you can choose to lead the battle yourself. Every time a marshal leading your army wins a battle or plunders a village, he gains experience, and when he gets enough, you can buy an attribute. Some of the attributes are useless, and one in particular is completely overpowered, but they do well at augmenting the way you play.
There's so much more to KoH that I can't possibly list it all here. If you're a fan of epic strategy games, and you don't mind a few minor quirks, you owe it to yourself to spend the few bucks to give it a shot, because KoH is easily one of the best strategy games I have ever played. (Just remember to patch it before you play it. ^_^ )