Spyware is software that uses an internet connection in the background without the user's knowledge. The purpose of spyware is to collect user demographics by spying and tracking web surfing habits and other information. Sensitive or identifying data may be collected and your computer is now acting as a server to transmit information about you and your surfing habits to a remote site.
Spyware can increase your chances of receiving spam mail, viruses and adds to your bandwidth. If you don't want to be a part of these "demographics" you can can install spyware removal software such as Ad-Aware and Spybot Search and Destroy, which is free to individual home users. In addition, with the use of a firewall you can limit or prevent spyware from being installed in the first place.