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Behavior
You hear a lot about it, but you have to ask: So what, exactly does 'spyware' do?

It can do any of several different things. Software that does these things may also be called 'adware', and this sort of behavior is what the original 'semi-legit' unwanted programs did, although they have since expanded in disfunctionality.

Display Ads

This is why spyware is also called 'adware'. Spyware displays popup ads on your computer. Now, if you were just sitting there typing in Word and a popup showed up, you might get a little suspicious. So it waits until you're surfing the internet, and it pops up an ad. Worse yet, it puts an ad under the browser you're using, a 'popunder'. So you close the broswer, and you assume that the ad was placed there by one of the web pages you visited. (Various non-profit organizations and even government institutions have been critized for 'their ads' by people who were unknowingly running spyware.)

Replace Ads

Many people now just automatically ignore popups, so really clever spyware watches incoming pages and replaces ads, or things that look like ads, on web pages, with their own ads. As quite a lot of the internet is ad-supported, this is rather offensive behavior. Yes, ads in web pages are annoying, but at least they are supporting something you actually like.

Replace Affiliate Links

They also replace affiliate links with their own. Affiliate links are another way for free sites to support themselves. They provide a link to a book or something else being sold online, and if someone actually follows that link and buys something, the site gets a small percentage of the sale. You'll often see, on free sites, 'Buy something here and support the site'. Well, who to credit the sale to is encoded in the link, so spyware creators just went and got their own affiliate account, and the spyware changes the link so it goes to the same product but credits the wrong person. Instead of your favorite website getting 5% of the sale, someone who snuck software onto your computer got that 5%.

Replace Home Pages

Not only do they change the page you start with, but they'll keep changing it back if you try to change it. And change your default search. (Where the browser goes if you type something that isn't an address in the address bar.) This is very obvious, and incredibly annoying, so some spyware has stopped doing this, because annoyed people will go and buy software to clean their computer.

Replace Search Results

So the spyware changed your default search, but you outsmart it by typing in the name of your search engine and going there directly. It looks perfectly normal. You do a search. Do the results look a little odd? Is there no logo at the top? Well, spyware just gave you a 'fake' page, a search done using their own search engine (Usually a pay-for-position one) by intercepting your search query and sending it to their site. The most sophisticated ones will even leave the URL bar wrong, and sometimes even put in the name and logo of the search engine you were trying to use. (Although that behavior risks a trademark-infringement lawsuit, and, as we said, spyware tries to stay mostly 'legit'.)

Tracks Your Movements

Well, if spyware is altering the web pages as they load on your computer, and most spyware is, it's a very small step to keeping track of what web pages load. Considering they're showing you ads, they often try to figure out your browsing habits to show you directed ads.