A Brief Description of System V Init
The following explanation is borrowed from tksysv (an inspiration for ):
System V init is fast becoming the standard in the world to control the startup of software at boot time. This is because it is arguably easier to use and more powerful and flexible than the traditional BSD init.
I won't go into the history here (mainly because I don't know it :-).
The init binary is located in /sbin and not /etc. This is important as one might try and upgrade a machine to System V init without re-installing and reformatting. The kernel looks in /etc for its init first, so you must make sure and delete your old init from there if any.
SysV init also differs from BSD init in that the config files are in a subdirectory of /etc instead of residing directly in /etc. This directory is called rc.d. In there you will find rc.sysinit and the following directories:
init.d/
rc0.d/
rc1.d/
rc2.d/
rc3.d/
rc4.d/
rc5.d/
rc6.d
init.d contains a bunch of scripts. Basically, you need one script for each service you may need to start at boot time or when entering another runlevel. Services include things like networking, NFS, , httpd, Services do not include things like setserial that must only be run once and then exited. Things like that should go in the file rc.local.
rc.local should be in /etc/rc.d if you want one. Most systems include one even though it doesn't do much. You can also include an rc.serial in /etc/rc.d if you need to do serial port specific things at boot time.
The chain of events is as follows:
The kernel looks in several places for init and runs the first one it finds.
init runs /etc/rc.d/rc.sysinit.
rc.sysinit does a bunch of necessary things and then runs rc.serial (if it exists)
init runs rc.local
init runs all the scripts for the default runlevel
The default runlevel is decided in /etc/inittab. You should have a line close to the top like:

id:3:initdefault:

From this, you'd look in the second column and see that the default runlevel is 3, as should be the case for most systems. If you want to change it, you can edit /etc/inittab by hand and change the 3. Be very careful when you are messing with the inittab. If you do mess up, you can get in to fix it by rebooting and doing:

LILO boot: linux single

This should allow you to boot into single user mode so you can fix it.
Now, how does it run all the right scripts? If you do an ls -l on rc3.d, you might see something like:

lrwxrwxrwx 1 root root 13 13:11 S10network -> ../init.d/network 
lrwxrwxrwx 1 root root 16 13:11 S30syslog -> ../init.d/syslog 
lrwxrwxrwx 1 root root 14 13:32 S40cron -> ../init.d/cron
lrwxrwxrwx 1 root root 14 13:11 S50inet -> ../init.d/inet
lrwxrwxrwx 1 root root 13 13:11 S60nfs -> ../init.d/nfs
lrwxrwxrwx 1 root root 15 13:11 S70nfsfs -> ../init.d/nfsfs
lrwxrwxrwx 1 root root 18 13:11 S75keytable -> ../init.d/keytable
lrwxrwxrwx 1 root root 23 13:11 S80sendmail -> ../init.d/sendmail.init
lrwxrwxrwx 1 root root 18 13:11 S90lpd -> ../init.d/lpd.init
lrwxrwxrwx 1 root root 11 13:11 S99local -> ../rc.local

What you'll notice is that there are no real files in the directory. Everything there is a link to one of the scripts in the init.d directory.
The links also have an S and a number at the beginning. The S means to start this particular script and a K would mean to stop it. The number is just there for ordering purposes. Init will start all the services based on the order they appear. You can duplicate numbers, but it will only confuse you somewhat. You just need to use a two digit number only, along with an upper case S or K to start or stop the services you need to.
How does it start and stop services? Simple. Each of the scripts is written to accept an argument which can be start and stop. You can execute those scripts by hand in fact with a command like:

/etc/rc.d/init.d/httpd.init stop

To stop the httpd server. Init just reads the name and if it has a K, it calls the script with the stop argument. If it has an S it calls the script with a start argument.

Why All These Runlevels ?
Some people want an easy way to setup machines to be multi-purpose. I could have a server runlevel that just runs httpd, sendmail, networking, Then I could have a user runlevel that runs kdm, networking,