Automatic Updates works based on the system you are running. If you are running Server 2003, it will search for updates just for Server 2003, not XP, Vista, or any other OS. I have mine set to automatically download and install updates. While this may not be for everyone, you can have it notify you when updates are available, and then pick-and-choose which updates to install. Would I recommend turning it off all together? Absolutely not. As for Microsoft (I hate the M$ crap) gathering information about if your system is legal or not, it's not done by Automatic Updates. The validity check is through Windows Genuine Advantage (WGA), and that check your product ID against a set of blacklisted keys, basically. I'm going to assume that you were upgrading Windows when it asked you if you wanted to download updated setup files to the system, because I've never noticed that on a clean install (Boot from CD). If your network is available, it wouldn't hurt to have setup check if there are newer versions of it to use, but it's not really needed. As for the Is this copy of Windows legal? in the help dropdown, it is in Windows whether it is a pirated copy, retail, or OEM. It is there to help you know if the version of Windows you bought from the store, or Billy Joe Bob from down the street is legit. Hope that helps you understand better.
