[Formendacil]

Here's my take...

Sauron was still somewhat "weak" from getting drowned in Numenor. Not drowned as in "dead", but drowned in that he needed to recreate a totally new body- which we are told (I seem to recall) is a rather draining experience. It's only about a hundred years later, a blink of an eye for a Maia, and so Sauron is still not at his full power.

Neither is his army, which is why Gil-galad and Elendil are able to smash through with the Last Alliance, and make it right up to him, face-to-face, and take him on. Still not at his full power, and vulnerable to weapons in his physical form (think Glorfindel and the Balrog), Sauron is stabbed/sliced by the two High Kings, thereby killing his weaker physical body. This initiates a shutdown as his body "explodes", which kills Elendil and Gil-galad in the process (doesn't it say that Gil-galad was killed by the heat of Sauron's hand somewhere...). Elendil falls down on Narsil, breaking it.

So Elendil is dead, Gil-galad is dead, and Sauron's body is vanquished, leaving him extremely vulnerable. It is at this time that Isildur comes up. He sees his father dead, and the hot, dead body of Sauron. He takes the hilt-shard of Narsil, and cuts off Sauron's ringfinger as a sign of victory, and takes the Ring for himself. Then Elrond and Cirdan show up and try to talk him into throwing it away, etc, etc.

Now, this is just my understanding/theory as to how it all happened. I may as well toss it out, and see what happens.