My take
I have read every post in this thread (just finished in fact). Frankly I think most of you (which means between 51% and 99%) are missing the real crux of the matter.
In a game setting where there are spells that can determine if a creature is evil or good, and certain spells directly and dramatically affect creatures based on whether they are evil or good (or lawful, or chaotic), there is much less moral ambiguity. Let's say the party was far more powerful than it seemed in your specific example (stay with me here), and the 14th level Cleric of Billybob (a non-existent LG Halfling deity) cast Holy Word, the effect of which is to kill non-good creatures of less than 4 HD (assuming Hobgoblin young had less than 4 HD). Do the "Children" die? If so, then they were not good, whether they were wimpering in a corner or not. Evil is often cowardly. Just because a creature realizes it can't defeat it's enemies and chooses to play on it's enemies mercy does not mean it is not evil, it just means it knows it can't win by force. Maybe it is just scared and confused, so what? Grimer Wormtongue is all wimpering and cowering when confronted by armed warriors, but what happened to the one helpless Hobbit he had under his power?
What defines Good Characters and Evil Characters in a fantasy setting is more their goals than their specific actions. Hobgoblins' goals are to compete with and defeat the 'Good' people of the world. Their Gods are evil (as evidenced by access to the Evil Cleric Domain) and the culture of D&D is NOT 21st Century Earth. One of the most fun parts of D&D is that there are Black and White absolutes. You can slaughter Kobolds, Hobgoblins, Dark Elves, Mimes, Fire Giants, Dragons, and undead. The occasional exception to the rule can be fun (a goblin who sees the PC's slaughter a bunch of Ogres that he had been a slave to becomes the Human Bard's 'Valet'). However, the main thrust of the game should be in crafting tales that are generally heroic and in keeping with the fantasy cultures.
Corellon Larethian has no problem with the wholesale slaughter of Dark Elves, Garl Glittergold is all for using powerful evocation magic on Kobold communities, In My own Twin Crowns campaign Casting Storm of Vengeance on the village of a community of Amphites is not only Ok, it is commendable. The goals of evil species are the eradication of the good species. As James Kirk pointed out when told that there was no differnce between the methodologies of good and evil, the difference is what they fight for, not always in how they fight. I'm not saying that specific actions are irrelevant, they are indications of a character's pursuit of their goals. The LG Paladin cannot trample down helpless old women for no reason and keep his alignment. He can stoically see an old woman put to death by a villain rather than reveal the secret entrance to the King's Keep (Of course he should make a heroic attempt to save her if he can).
In D&D Good vs Evil is not subjective, it is objective. There are clearly defined lines of Good and Evil, as a DM it is up to you to communicate what those lines are to your players. While it may be fun to occasionally blur the lines, doing this too often leads to a campaign where the PC's can be paralyzed into inactivity. "We freed the humans only to discover they were the bad guys? The Bugbear was really a LG priest Polymorphed into a Bugbear? Gosh we thought he was lying!" These are interesting twists but if all they ever see are 'interesting twists' then what are they to measure them by? The majority of enemies the PC's face should be the kind they can easily determine how to react to, that's what makes unusual situations interesting and ... well... unusual.
Finally to address the specific example, killing the hobgoblins was not evil. They are an evil race and they will get bigger and come back and kill other good people, it's what they do, it's what their culture and their Gods demand. If someone wants to make an argument that it wasn't good either, that I can accept, but to say it's evil because they are little is ridiculous. A young dragon is still a dragon, a little beholder is still a beholder, etc.... etc.... The Chaos Elf's character does not have access to the Monster Manual, if all his character knows about Hobgoblins is that they are evil and should be detroyed then he has not commiteed an evil act, if he discovers later that they were in fact a family of halflings with an illusion cast on them to look and act like Hobgoblins then he can feel badly about it and go looking for the cruel SOB who set that up, but that's about as far as it need s to go for someone playing a Chaos Elf...Killing the Druid was extreme and I think an evil act. Beating the druid taking his stuff and driving him away from the group would be much more justifiable in light of his inaction, demanding a better explanation would have been acceptable, assigning someone else lookout duty so the druid could prove he wasn't some sort of coward tag along, also acceptable. Unilaterly killing a party member? Evil baby, definitely evil. Does that act alone make the character evil? No, but it does indicate just how chaotic he is, and the rest of the group should not only take notice but be very wary of him from then on. It wouldn't take a lot of prompting at that point for me to have a few secret conversations wit other party members on what contingencies we should lay down in case Mr Chaos Elf starts looking at the any of the rest of us in a funny way...
"Mine is the last living voice you will ever hear, God has sent me."
-Susan Ivanova
