Although spyware and adware are often confused with one another, they are actually quite different.

What is spyware?

Spyware is a program that gathers information about a person or an organization and sends this information to a third party, often without their permission or knowledge. Unscrupulous companies often use this data to send you unsolicited targeted advertisements.

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What is adware?

Adware is a program that displays advertising through pop-up or pop-under windows while you are browsing the net.

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The link between spyware and adware

Although Spyware and Adware are quite different, Spyware is often associated with adware as they compliment each other.

For example, advertisers use spyware to obtain information about their victim's browsing habits or something even more personal like a person’s user name and password. Then they silently install adware on your system to generate unsolicited targeted advertisements. Sometimes, these advertisements may contain pornographic or other sensitive material that some might find inappropriate. These unwanted advertisements affect the perfomance of your computer and cause a lot of irritation for the user.

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Exceptions

However, not all software that generates targeted advertisments or keeps a track your online activities are bad. Some companies offer free software applications and in return display pop up ads based on your online behavior. Such an arrangent is a fair tradeoff. Similarly, some websites track their user's online activities. This information would be useful to the website owners to customize the website's look and feel to suit your specific needs.

Hence, the important thing here is whether you have been notified in advance of such an arrangement.

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Methods of propagation

There are many ways Spyware and Adware can make their way into your computer. Here are a few potential ways.

Computer Virus or Worm

A computer virus or worm can install spyware and adware on your computer. This will enable a person to access your computer illegally, from a remote location. In this case, your computer can be used by the hijacker to send out spams or perform other malicious acts such as password theft and keylogging.

Software bundle

You may unintentionally install spyware or adware, while installing other software. For example, many file-sharing programs come with spyware and adware that send information about your browsing habits to the company or display targeted advertising pop-ups whenever you are browsing the web.

Automatic Download

Some webpages cause automatic and sudden installation of spyware or adware, without prior notice. By default, most browsers should ask whether you want to continue or stop the installation of the software. Usually, you would still not be provided with any information of the program you are installing. Below is a screenshot of such a sudden installation:

Unintentional Download

Sometimes, you may unintentionally install spyware or adware while browsing the net. This typically happens when you have to download certain programs that appear to be a special plug-in that is required by the site. However, the program may actually turn out be a adware or a spyware.

Others users of your computer

Other (malicious) users of your computer may also purposely install spyware on your computer to to capture your passwords or other personal information.

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Reference

What is spyware?
http://www.spychecker.com/spyware.html

Microsoft security at home : Spyware
http://www.microsoft.com/athome/security/spyware/default.mspx

Adware : from Wikipedia
http://en.wikipedia.org/wiki/Adware

Symantec Security Response - Adware
http://sarc.com/avcenter/expanded_threats/adware/