that's not quite correct.
the story is that windowsxp sp1 license agreement contains some controversial point that users must accept to install the service pack with contains some advanced feautures such as autoupdate.
Microsoft needs to scan system components and configuration to supply security and critical updates in rder to deliver the correct updates, this happened also before the autoupdate feature, what changes now is that you must accept that all the system updates are now transparent... means that every once in a while windowsxp automatically checks available updates and eventually patches the system without you even know about what's going on in the background.
Moreover SP1 contains a revised version of WPA (Windows Product Activation). Before installation SP1 checks the product serial number and proceeds only in case is a valid one or if the system is not cracked. If a system is not legally eligible for an update the service pack quits installation and prevents the user to access WindowsUpdate internet feature. In some days/weeks also WindowsUpdate will check serial and system integrity via the internet before you can actually download updates.
Another recent news is Windows Media Player will do the same autochecks for media components of the system along with a restrictive fix to DRM. Most people complain about DRM (Digital Rights Management) which prevent WMA (Windows Media Audio) files to play after a certain time/date (digital licenses expire) or on other machines where they are created.
All these things make people say Microsoft breaks into people's privacy... sort of *big brother* controversy.
Microsoft say anyway that no personal info is gathered in any of the above automatic checks. People don't know to believe it or not.
The thing is:
people complain about frequent critical updates and the total cost of keeping windows up to date and about non experienced users who are not concerned in securit issues and don't know actually what to do or whether update their system. Autoupdate comes after this kind of requests.
What I say is you can't have it all.
If one wants a system up to date but don't want to bother about this then have to accepts autochecks of the system via the internet every now and then without his knowledge.
As for the serial number... I think it's Microsoft's right to provide updates and support only to legal users of their products, many softwares out there do this from years now but no one ever complained. If you have a regular license of the software there is no need to worry, differently you'll get busted. You can't complain with a software house because you have a pirate copy of their software and they want to know about it through the services they are delivering.
If you don't want this then do the thing manually yourself as you did till yesterday, autoupdate is only a feature that can be useful and it's not forceful. Also disable DRM in Windows Media Player or use another player if you don't want this ****.
It's all about choice, and say what you like you do have a choice for all these new toys, you can use them or not.
If you suspect MS is doing something wrong with your pc then just switch to Mac (and spend a lot more if you ever did) or some distro of Linux (and enjoy months of frustrations)... you'll find autoupdates there also which will do the same scans of WindowsXP. Decide who you can trust.