It changes in response to both actions and dialog (and you can see the results on your character screen).
In one zone, for instance, you have to choose which of two fairly lawless gangs to help (or neither). If you kill both, you're essentially neutral. If you strike a deal with the one that murders without qualms all who enter the area, you're slightly more evil. If you deal with the one that extorts, but doesn't quite push to murder, and really is trying to organize people to get a better life, then you move slightly to the "good" side.
There are some instances in conversation where NPCs will ask for your opinion. Some options reinforce law; others tend toward chaos. Again, your choices move you along a spectrum.
And there's a book that will offer you power in exchange for doing some despicable deeds (like selling one of your party members into slavery), and offer wisdom free of charge. The wisdom it provides, however, is cynical and paranoid, and gradually moves you over at least one place on the good/neutral/evil scale.  | 
Linear Mode
