Microsoft has had this on their site for a while though you could opt out of it. When you go to download some things it has a part where it wants to verify your version of Windows. Before you could skip it but you knew that they'd turn it on fully one of these days.
It only checks for a valid copy of Windows, it doesn't look for any other software.
Security updates aren't restricted (which is good). And just as with activation, no information is sent to Microsoft, only a yes/no if your copy of Windows is valid.
Keeping your operating system up to day is pretty important security wise; an unpatched Windows XP box put onto the Internet will be hacked in an average of 12 minutes...
EDIT:
http://www.techworld.com/applications/news...cfm?NewsID=4102