Spyware is any technology that aids in gathering information about a person or organization without their knowledge....
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On the Internet (where it is sometimes called a spybot or tracking software), spyware is programming that is put in someone's computer to secretly gather information about the user and relay it to advertisers or other interested parties. Spyware can get in a computer as a software virus or as the result of installing a new program.
Data collecting programs that are installed with the user's knowledge are not, properly speaking, spyware, if the user fully understands what data is being collected and with whom it is being shared. However, spyware is often installed without the user's consent, as a drive-by download, or as the result of clicking some option in a deceptive pop-up window. Software designed to serve advertising, known as adware, can usually be thought of as spyware as well because it almost invariably includes components for tracking and reporting user information. However, marketing firms object to having their products called "spyware." As a result, McAfee (the Internet security company) and others now refer to such applications as "potentially unwanted programs" (PUP).
The cookie is a well-known mechanism for storing information about an Internet user on their own computer. If a Web site stores information about you in a cookie that you don't know about, the cookie can be considered a form of spyware. Spyware is part of an overall public concern about privacy on the Internet.
Many Internet users were introduced to spyware in 1999, when a popular freeware game called "Elf Bowling" came bundled with tracking software.
(This information courtesy of Whatis.com.)