A lot of live upgrade systems have to scan your system to see what you've already got. Microsoft claims that a local download takes care of this, and that this information is not actually transmitted back to Microsoft.

Obviously, if they wanted to, even if my system was a black box to them that just requested certain updates, Microsoft could still track all my updates, and make an educated guess as to what version of their software I am using. Since driver updates are also included, they could also deduce what my peripherals are. Not sure what they'd do with this information.

With my defenses, I'm reasonably satisfied that nobody outside my local home network can "fish" around in my hard drive. I have the option to encrypt folders if I want to, but I've got nothing that sensitive.

The nice part about having so many different anti-spyware systems jostling for position, is that if Microsoft actually did plant something nasty in their software, it would be public knowledge in a week, and there would be five programs out there to protect against it a week later.