When I came in they (sit) round the fire. Mr. Smith (do) a crossword puzzle, the others (read), Mrs. Smith (smile) at me and (say). ''Come and sit down".

When I came in, they were sitting round the fire. We used Past Continuous to denote a past action in progress, which was interrupted by another, shorter action in the past (denoted by Past Simple Tense)

Mr. Smith was doing a crossword puzzle, the others were reading. (We used two verbs in Past Continuous Tense to denote two actions, which were going on simultaneously, at the same moment.)

Mrs. Smith smiled at me and said, ''Come and sit down'. Here we used two verbs in Past Simple to denote two consecutive single actions in the past.