Windows Update by itself may not collect personally identifiable information on its own, but you can bet your bibby that if you have a Passport (and if you have a hotmail or msn account, you do), Bill Gates can correlate the information from Windows Update with the information you submitted during your Passport registration, and get all the personally identifiable information that he needs.
That way, he can figure out your name, address, birthdate, credit card numbers, location, IP address, ISP, hardware configuration, the software installed on your hard drive, and how much porn you have.
This is a privacy violator's wet dream.