Thank you very much LikeTheWhirlwind. It's great news that the system is almost like my guess number 4. The only difference here is that damage after reducing defense is applied in it's entirety. That's something that I can live with.
It would be very, very nice to have the actual numbers displayed on the UI! Right now we see the sum of all members of the unit, even though that number is never actually used in the calculation! Very misleading.
p22: Let's take an example of what LTW said
6 knights with an attack of 10 attack 6 peasants with defense 4. Peasants have 5 hitpoints each.
Knights roll: 1, 0, 4, 5, 6, 10
defense: 1, 0, 1, 1, 4, 0
damage: 0, 0, 3, 4, 2, 10
Total damage would be 3+4+2+10 = 19. Three peasants die.
In MoM, the last attack would kill one peasant and then the leftover 5 damage points would get the defense roll of the next peasant. In Elemental, it kills two outright.