Limited has most of it down. It's a bit more involved. Basically, there are 4 types of people.
There is the moderator. He doesn't actually play, but just runs it because he knows who is what.
There are two werewolves. They know who each other are.
There is one seer. He is the only one that knows he's the seer.
The rest of the players are villagers. They don't know who either the seer or the werewolves are.
To play well, you probably need at least 9 players. That's one moderator, one seer, two werewolves, and 5 regular villagers. More villagers is even better.
It goes in stages of day and night. At night, everything happens behind the scenes. First, the werewolves open their eyes and indicate a villager that they want to kill. Next, the seer opens his eyes and indicate a villager they he wants to "detect". The moderator tells him whether or not that person is a werewolf.
Next stage is day. Everyone opens their eyes and the moderator lets them all know who was killed by the werewolves during the night. Then, they all debate about who they think is a werewolf. At the end of the day, they must select one villager to hang. That person then reveals if he was a werewolf. If the seer is killed, he says nothing other than the fact that he wasn't a werewolf. No one gets to know who the seer is.
The seer may choose to reveal himself at some point in the game, but is not required to do so because it also makes him a target for the werewolves. Also, anyone is free to basically say anything, so a normal villager could claim to be the seer if they wanted to draw attention to themselves to protect the real seer. A werewolf could also claim to be a seer to try to influence who the villagers kill or to try to get some indication of who the real seer might be.
The rest is as limited says. You alternate between day and night until both werewolves are killed or until the werewolves outnumber the villagers.
As the thread mentions, it works better in real life than online, but if we get enough people interested, I wouldn't be opposed to moderating.