Alignment, the cause of so many disputes in D&D... which is why I'm writing up a short note to clarify how I'm treating it in Lost Souls, though most of my players will already have a good idea of how I run it.
Alignment is composed of two axis - Moral and Legal. The moral axis is personal, in that it describes whether someone is selfish or altruistic, whereas the legal axis is about the relationship with society, or lack thereof. Neutrality lies between the extremes of both axis.
A good character is someone who acts with altruistic intentions. While a good character's actions may benefit themselves, in general they would be willing to sacrifice themselves to help others. It also implies respect for the choices of others, and a willingness to be proactive when encountering evil acts.
An evil character is someone who acts in their own interests. While their actions may benefit others, this isn't something they would take into account. As such, it implies that they would be willing to do terrible things to other people to gain even a small benefit, given that the risk was acceptable. It also implies a contempt for the abilities of others and an unwillingness to commit to helping anyone else.
A chaotic character does not, in general, recognise the existence of authority. Any laws or rules are therefore held to be objectionable by their very existence. The creation of a system of rules is hence regarded as being corrupt, weak, inefficient or deceitful. It also implies a lack of respect for tradition, and a strong belief in independance.
A lawful character, in general, asserts that there is an authority for any field of action. While any particular system of laws may be questioned, nonetheless, almost any system is preferable to anarchy. The creation/following of a system of rules is the highest endeavor. It also implies respect for tradition, cooperation, and a belief in an objectively correct Law.
A morally neutral character feels no need to go out of his way to help others, but isn't willing to go to the extremes of evil to promote themselves. They may be willing to act given an obligation, a strong emotional attachment or a personal incentive, but would not take the disproportionate risks that a good character would.
A legally neutral character has no particular attachment to rules or freedom, and may be persuaded into either by circumstances. However, they may still fear an anarchy, or totalitarian state as being too extreme, and such a threat may move them to action.
Naturally, this establishes the grid of alignments. Good alignments are the norm for player characters, and evil alignments for villains. Neutral alignments depend on the context for either.
Lawful Good - "Champion"
A lawful good character acts without hesitation to defend the weak and innocent, and to uphold justice for all, keeping himself to the same high standards. Justice must be done, and must be seen to be done. Nobody is above the law, and the law reflects the best in people. Paladins, almost unknown in Lost Souls, must keep this alignment. This is the best alignment for an adventurer, because it upholds the best in people and society.
Neutral Good - "Benefactor"
A neutral good character helps others without concern for the rules of society, helping others against the rules or helping a magistrate enforce and create good laws. Recognising both the dangers of anarchy and the stranglehold of tyranny, he seeks to avoid both. This is the best alignment for an adventurer, because it requires nothing other than a good will to do good.
Chaotic Good - "Rebel"
A chaotic good character seeks to help others by releasing them from unjust authority. Naturally, he has yet to meet a just one, and believes that no one set of rules is right for everyone. Anyone who thinks that there is is probably after control and corruption. People would be best off living free lives, beholden to nobody, owning their own land. This is the best alignment for an adventurer, because it demands true freedom as well as good for everyone.
Lawful Neutral - "Enforcer"
A lawful neutral character knows that the law is the highest authority - to go against it is a moral offense. Although it may be necessary to go against it in a minor way to preserve the system itself, he finds this deeply distasteful. However, if commanded, he will obey, and he is willing to accept even secret laws. Though a law my be (arguably) flawed at the moment, it is more important to enforce it now for the good of the system then change it later than make an exception. This is the best alignment for an adventurer, because it shows the resolve and commitment to do what is right without favour. This is the best alignment for a villain, because it is blind, intolerant, yet committed and resourceful.
True Neutral - "Sceptic"
A true neutral character has no particular ties on moral or legal matters. Naturally, he prefers good neighbours to evil ones, as long as they don't expect him to do anything. Similarly, a lawful society is more reliable than anarchy (as long as you're on the right side of the law). In general, it's none of his business. Most people in the world are true neutral, and don't feel any urge to go out and do great things. However, those that do do so with a passion for a particular cause, whether it be friendship or another factor, which may drive them to the same levels of sacrifice as the most noble. This is the best alignment for an adventurer, because it ignores posturing, and only acts on what's important to him. This isn't the best alignment for a villain really, but they may stand in opposition by virtue of being unwilling to help in something important.
Chaotic Neutral - "Anarchist"
A chaotic neutral character doesn't care about others, but hates it when they tell him what to do. Living free in a loose society, that's what he wants. However, if given a good personal reason to act or a grievance, he becomes the ruthless anarchist, willing to do any act to overthrow the system. Not the revolutionary planning his own government, but the chaos of lawlessness. Lacking any great motivation though, he may break minor rules to show they mean nothing to him, but not take any great risks. This is the best alignment for an adventurer, because it acts on personal impulses, unrestricted by other people's ideas. This is the best alignment for a villain, because it works to bring down order and justice in insidious ways, uncaring of the damage his actions do.
Lawful Evil - "Tyrant"
A lawful evil character seeks to make the best of it for himself, and knows that he can only do this through the exploitation of rules to make others do as he wishes. Naturally, the rules don't need to apply to him, but appearing to obey them keeps him safe from retribution. He feels no need to keep his word unless it's proven that he said it, but has faith in the fact that others will keep by their promises and the rules. Ideally, he would be the tyrant of an empire, his decrees granting him power and wealth beyond imagining, but he's willing to settle for a merely decadent existence serving another. This is the best alignment for a villain, because it exploits the law many respect to do great harm and shield the guilty.
Neutral Evil - "Schemer"
A neutral evil character only cares about his personal benefit. This might be knowledge, power, wealth, or any of a hundred things, but he's willing to do anything to get it. Although finding it distasteful to serve others, they will accept a temporary position to further their aims. In fact, everything is temporary before their goals, and no deed is too dark if they will get away with it. He tends to prefer loose societies with a decent amount of freedom to do what he wants while allowing him to cut and run if problems start. Killing without hesitation, sacrificing everything for his goals, this is evil without any illusions of justification beyond the goal. This is the best alignment for a villain, because it is adaptable and unrelenting in the pure pursuit of a desire.
Chaotic Evil - "Warlord"
A chaotic evil character is usually after power and strength, and scorns rules as a tool of the weak. There is no law save the dictates of the mighty. When weak, no means is too low to bring down those higher than you; when strong, fear is necessary to keep all others in line. There is only room for one at the top, and the winner takes all. Any organisation is very loose, held together by the threat of punishment and the desire of the underlings for the power to lead. This is the best alignment for a villain, because it seeks to bring down everything which is weak as an expression of power - including all of society.
Most people are True Neutral - they just don't commit that much to a view. In fact, in general only clerics and paladins detect as their alignment strongly. Unless someone is a saint or a serial killer, they will only be faintly good or evil, lawful or chaotic. Tricky situations include revolutions - the person leading the revolt is probably as lawful as the person heading the government, they both believe in systems and order, but the devil is in the details...
Oh, and monks have no alignment restriction. And there is no need to dress in crazy colours to be chaotic.