First, it's important to remember that any significant action is likely to have some negative consequences. One test is to ask, "Ignoring personal loss/gain, would the world be better if I stopped doing X?" For example, if a spammer stopped spamming, I think we'd all be better off, therefore spamming is probably evil. On the other hand, news.yc is a nice service that benefits a lot of people, so it's probably non-evil.
At the specific time that I made up the "Don't be evil" phrase, there were a number of topics in mind, including the spyware/scumware problem, and paid-inclusion, which was popular at the time among our competitors (you could pay to sneak your site in their regular search results). These are both examples of tricking your users for your own benefit, which is generally evil. Paid inclusion is hidden advertising -- none of their users knew which results were paid for. It would be similar to a reporter who takes bribes to write favorably about something. Spyware is evil not because it is spying on you, but because it is doing so without your consent and probably against your will. If users had actually knowingly given informed consent (not hidden in some EULA somewhere, or anything like that), then the "spyware" wouldn't be evil -- it's like the difference between justin.tv filming his own life, and someone else secretly doing so.