Windows Genuine Advantage checks the following components:

Computer make and model
BIOS checksum.
MAC address.
A unique number assigned to your computer by the tools (Globally Unique Identifier or GUID)
Hard drive serial number.
Region and language settings of the operating system.
Operating system version.
PC BIOS information (make, version, date).
PC manufacturer.
User locale setting.
Validation and installation results.
Windows or Office product key.
Windows XP product ID.

"The notification tool has been accused of spyware-like behavior, "phoning home" on a daily basis. Microsoft subsequently admitted the behaviour..."

"On Windows Vista, WGA validation failure has a greater impact. In addition to persistent notification and the disabling of non-critical updates, WGA also disables Windows Aero, Windows Defender, and ReadyBoost."

"If you're doing nothing wrong, you have nothing to fear?"

Wrong- Check out the "false positive rate"

(I caved, took the update to get rid of the notice)