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Generally, a Trojan is not by definition a virus, and contrary to popular belief, they do not spread to other programs and other computers like a virus, either. However, they are one of the leading causes of computer break-ins. They can also contain a virus within them.
Trojans are generally programs that pose as a legitimate program on your computer and add a subversive functionality to it. That's when it's said a program is Trojaned. For example, a Trojaned login program can be written so it accepts certain passwords for any user's account to give the intruder access to your computer. A commonly used program called Toolkits is actually a suite of several Trojans that can be put on a Unix machine by an intruder. It contains a password sniffer, a backdoor program to let the hacker back into the machine at any time, replacement binaries for common programs and, finally, a log cleaner to cover its trace.
Trojans can contain a virus, a password grabber or they can be a RAT (Remote Access Trojan) that is designed to allow remote control over your system. Some Trojans contain built-in scanners that automatically scan the Network from your computer, looking for other copies of themselves. The most commonly used Trojan is The Sub 7 Trojan. What makes it common and dangerous is the fact that, unlike other Trojans that are written once and forgotten, Sub 7's author provides constant improvements and new versions for his Trojan. This Trojan can be really destructive or just annoying.
Remote access Trojans such as Sub 7 consist of two parts: one part that resides on the victim's computer and the Control module that resides on the intruder's machine. Using the control interface, the intruder can take control of your computer, flip your background picture, speak out of your speakers, reboot your computer or do serious damage to your machine. Basically, they can pretty much do whatever they want. However, these days, most Trojans are being used to turn your computer into a zombie. In other words, the intruder will be able to turn your computer, and a bunch of other infected computers like yours, into an army of zombies to attack a more important target. This way, the intruder can hide his or her own trace and use your computer as a front. This means the victim's firewall will show your IP address in the log as the attacker's IP, and you may end up with several complaint letters to your ISP and even lose your account as a result.
So, just because you think you have nothing important on your computer doesn't mean your computer itself and your bandwidth is not valuable to hackers. In fact, they are quite valuable and worth the hacker's time.