Alignments refer to how good (or evil) you are. This doesn't have any effect of battles, but it does have a huge effect on quests. Here's a quick table. The alignments are listed from Best to Evilest (if thats even a word).

Angelic
Pure Hearted
Benevolent
Neutral
Malevolent
Black Souled
Demonic

    Quests always have two sides, one for each alignment. Sometimes, you are forced to do one side of it depending on your alignment (ex. You are Black Souled, so you must do the Evil quest). Other times, you can choose either side and it will just effect your alignment appropriately (ex. You are Black Souled, and you choose to do the Good quest. Your alignment may rise to Malevolent afterwards).