The term "spyware" usually refers to a program that sends information about the user's habbits to a central server. therefor it makes your privacy public.
It doesn't go as far as sending your whole harddrive to someone but it usually keeps track of the websites you visit, the ads you click and stuff you're interested in.
Spyware has become popular to software companies that offer their programs for free. that's because the spyware people pay money to those who include the spyware in their software and help to bring it on the users systems. nobody would say "hey, i need a tool that sends out all my habbits to the world and others"... So spyware comes through the backdoor bundled with other software. Usually you are only informed about that fact when you read the terms and conditions very closely.
The information gained by spyware is usually used to send you ads on the screen that are more in your favor (stuff you're interested in) so you click them and at best buy something. the ads you see on most webpages or in limewire are therefor customized to your interests most of the time.

The tool that is refered to in the first post can be used to detect and remove this kind of software (spyware) from your system.
hope that helps!