Read the official definitions for
Spyware and Adware
from Whatis.com

Why is it called "Spyware" ?
While this may be a great concept, the downside is that the advertising companies also install additional tracking software on your system, which is continuously "calling home", using your Internet connection and reports statistical data to the "mothership". While according to the privacy policies of the companies, there will be no sensitive or identifying data collected from your system and you shall remain anonymous, it still remains the fact, that you have a "live" server sitting on your PC that is sending information about you and your surfing habits to a remote location..
Are all Adware products "Spyware"?
No, but the majority are. There are also products that do display advertising but do not install any tracking mechanism on your system. These products are not indexed in our database.

Is Spyware illegal?
Even though the name may indicate so, Spyware is not an illegal type of software in any way. However there are certain issues that a privacy oriented user may object to and therefore prefer not to use the product. This usually involves the tracking and sending of data and statistics via a server installed on the user's PC and the use of your Internet connection in the background.

What's the hype about?
While legitimate adware companies will disclose the nature of data that is collected and transmitted in their privacy statement (linked from our database), there is almost no way for the user to actually control what data is being sent. The fact is that the technology is in theory capable of sending much more than just banner statistics - and this is why many people feel uncomfortable with the idea.

On the other hand...
Millions of people are using advertising supported "spyware" products and could not care less about the privacy hype..., in fact some "Spyware" programs are among the most popular downloads on the Internet.

Real spyware...
There are also many PC surveillance tools that allow a user to monitor all kinds of activity on a computer, ranging from keystroke capture, snapshots, email logging, chat logging and just about everything else. These tools are often designed for parents, businesses and similar environments, but can be easily abused if they are installed on your computer without your knowledge.

Spyware can be broken down into two different categories, surveillance spyware and advertising spyware.

Surveillance software includes key loggers, screen capture devices, and trojans. These would be used by corporations, private detectives, law enforcement, intelligence agencies, suspicious spouses, etc.

Advertising spyware is software that is installed alongside other software or via activex controls on the internet, often without the user's knowledge, or without full disclosure that it will be used for gathering personal information and/or showing the user ads. Advertising spyware logs information about the user, possibly including passwords, email addresses, web browsing history, online buying habits, the computer's hardware and software configuration, the name, age, sex, etc of the user.

As with spam, advertising spyware uses the CPU, RAM, and resources of the user's computer, making the user pay for the costs associated with operating it. It then makes use of the user's bandwidth to connect to the internet and upload whatever personal information it has gathered, and to download advertisements which it will present to the user, either by way of pop up windows, or with the ad banners of ad-supported software. All of this can be considered theft in the cases of advertising spyware that installs without disclosure.