I'm not the source; Microsoft is the source. Every copy (license) of Windows XP has to be activated. The only way to avoid having hte activation take place on your PC is if you activate a license at the corporate level, in which case Microsoft sells you several activated copies and really doesn't care whether you use them all or not -- you've activated them regardless. I'm looking at the two packages I have right here, one for academic XP pro and one for regular XP pro. Both say in the "system information" section that they require "authentication with Microsoft to activate product."
While I, too, inherently bristle at the idea of electronic activation, the truth is that we're talking about the single most pirated piece of software in the world. How many people on this board have an illegal copy of windows at home? The process is incredibly simple, and I have no more reason to believe that they're lying about exactly what information they are collecting than I do to doubt what kind of information Anandtech collects through cookies when I visit the site.
I'm sure your privacy is far more compromised spending an hour on the net than it is installing Windows XP.
At any rate, you seem more focused on whether or not the software requires activation -- not what happens DURING activation. That's the only reason I was a bit... suspicious.