Windows Live Local Privacy Update
Location Finder sends signal strengths and MAC addresses of nearby wireless access points and standard HTTP request information such as your IP address to the Microsoft online location service. The online service calculates the user’s location from a database of known access point locations and returns an approximate longitude and latitude. If this method fails, other methods may be used such as IP address lookup.
Microsoft doesn’t do anything with the location data, he says. Via Boing Boing.