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Alignment is a characteristic of a town type. There are three alignments in Heroes III:

Alignment has almost no direct impact on the gameplay, it is mostly used in the storyline for obvious reasons. The only things in the game which are affected by alignment are the Altar of Sacrifice, the Angelic Alliance and a few of the Magical Terrains.

Heroes have the same alignment as the towns with which they are associated, not the towns in which they are hired. The Castle heroes, Knights and Clerics, will still be Good when hired in a Dungeon town.