[Stuff on initiative and being flat-footed.]
(This is an aside to the thread, and I won't be pursuing it further. (Thus no fork.) If you're just interested in the main topic, you can safely skip this.)
You're partially correct, but partially incorrect.
Intiative is rolled at "the start of each battle." (All quotes are from the SRD.) 3.5 isn't perfectly clear on when a "battle" starts, but it's pretty clear that attempts at parley aren't the start of battle, and nor is a villain's soliloquy. An encounter, in short, is not the same thing as a battle.
As a DM, I call for initiative whenever any party in the encounter does something that any opposed party has a chance to perceive as hostile. I suspect that nearly every DM uses this metric, even if he or she hasn't given it much thought.
A given combatant is flat-footed "before [he has] had a chance to act (specifically, before [he has had his] first regular turn in the initiative order)."
So, yes, heroes can interrupt a grandstanding villain by declaring a hostile action, at which point all involved roll initiative. If the heroes beat the villain on initiative, yes, the villain is flat-footed. (
Not "surprised." Flat-footed and surprised are separate concepts for a reason.) Part of the very
point of initiative is to determine who is caught slower on the draw when hostilities erupt.
What does this mean in practice? Well, a few things:
You can't walk around with a permanently readied action. You can't even ready an action while a villain is giving his speech.
You cannot ready an action out of combat.
You can raise your bow and point it unswervingly at the villain (and I'd recommend it; it's certainly what I'd do!), but the millisecond you twitch with the intent to release that nocked arrow, the DM should call for initiative.
If you want the heroes to listen to the soliloquy, you need to give them reasons to do so. In the past, for instance, not listening to the Big Bad in my game has led to the unintended (by the heroes) death of innocents. There are all sorts of reasons to listen: information, because it's just interesting, because the heroes are amazed that the villain is
this freakin' crazy, whatever.
But if the heroes have no reason to listen to the villain, then it's stupid for the heroes to listen to the villain. One of them
should declare he's shooting the villain in the throat! "Roll for initiative!"