From a comment I've read at Internet Monk comes this great explanation. There's no trackback link to contact the author, but I've a feeling she won't mind.
An easy diagram to explain (and picture) how grace and works go together is basically a circular diagram. If one starts out on the wrong part of the circle, we see how legalism works. But if one starts out on the right part of it, we see how it all works together.
Imagine a compass and the four cardinal directions. North is “God”, East is “Grace”, South is “Love” and West is “Perform”. In between are arrows pointing clockwise between the cardinal points.
The Legalistic understanding of the relationship of grace and works starts out on the West point with “Perform”. Thus, we try to “Do” or demonstrate our righteousness to curry God’s favor. This is self-righteousness. [As preached, it is the admonition to obey the bible, and thus be choosing grace.]
The gospel understanding starts at North with “God”. He declared us righteous through Christ. The arrow pointing from North to East “Grace” shows us that the act of justification is “Done” and we have “passive righteousness”. From Grace, an arrow points to South “Love”. Here we understand what Paul says that faith is by grace alone. But, we get to the South point and we see that Christ’s love for us compels us to perform for him. And as we follow the arrow from south to west we understand what James says about faith without works being dead. And so any righteous works we do are not to curry God’s favor, but instead are a response to the great grace we have received. I guess the bottom line is motivation. God is repulsed by the motivation of actions when they are self-righteous rather than motivations that are expressions of our love for the God who loved us first.
[So how can obedience to the bible (and the Lord) be preached? It needs to begin with the Gospel, not end with it. Worth noting is that in Al Mohler's article, Ray Ortland's article, Michael Spencer's article, and John Piper's article, all about legalism and gospel transformation, (all posted/linked below), little mention is even given to "obedience", but rather our natural reaction to God's awesome gifts in Christ.]