Once a challenge is accepted, the character that accepted the challenge is moved in the ranks so that the two protagonists are opposite each other. If this is not possible, then the challenger is moved in the ranks to a position where he is in base contact with the character that accepted the challenge.
When combat is worked out, these two will fight together. No other models may attack them or their mount, even if their bases are touching.
Note that the striking order is not affected by the challenge - charging models still strike first and so on. Note also that occasionally the presence of two characters engaged in a challenge may stop other models from fighting at all if the only enemy model they are in base contact with is the character.
Once a challenge is underway no further challenges may be issued in that combat until one character is slain or flees from combat. The challenge might therefore last over several turns of combat.
If a character is riding a steed or a monster, the mount fights in the challenge as well as its rider.
If a character is riding in a chariot, the creatures pulling the chariot will fight in the challenge, but the other members of the chariot's crew (if any) cannot attack at all until the challenge is over. Any impact hits from the chariot are worked out against the unit rather than the character fighting in the challenge. Only if the enemy character was on his own when the chariot charged, are impact hits worked out against him.
If a character is killed in a challenge and its mount (monster or chariot) still had no chance to attack in that turn, work out their attacks as part of the challenge. The challenge is then over.