This little nugget (nhinkle on SuperUser blog) popped up on Slashdot recently, describing just how Windows 7 (and I presume Windows Vista) knows whether your network connection is an unrestricted Internet conenction, has no connectivity beyond the local LAN or are behind a hotspot authorisation page. Of course, the state of your network connection may be more complex than that (proxy server requiring authorisation, badly configured routing, or wrongly reporting a working connection that drops your VPN traffic), but it's mostly quite good.
Essentially, the first thing the Network Location Awareness service does is check if it can retrieve a url specified in the registry, and if the contents of that file match a set string. If successful, NLA assumes you have full connectivity. If it fails, a DNS lookup similarly needs to match a specified IP, in which case it assumes you need to authenticate (e.g. you're on a hotspot).
The privacy concern is that your system is checking-in with a server controlled by Microsoft every time it attaches to a network, and periodically after that. Obviously, nobody knows how or if Microsoft is using any logs of these check-ins, but it opens an intriguing possibility now that instructions in the article reveal how to customise this behaviour. Essentially, you can instruct NLA to check-in with any URL you like.
As long as the file is retrieved with a 200 OK result and the string matches (apparently it's even sensitive to an extra CR/LF, so make sure it's generated correctly), everything is hunky-dory. But here's another possibility...
The URL retrieved doesn't have to be a simple text file. The URL could actually query a script (PHP, ASP(X) etc), as long as it returns a specified result. Using Group Policy, an administrator can update the URL to include a client-specific parameter (say an asset code, MAC address, serial number, username etc) in the form of http://some.server.com/NLACheckin.php?Serial=1234. The server script can then note the source IP/subnet of the request in a database, and presto! Real-time location tracking. Group Policies and/or client-side scripts make this rather trivial.
The great part of this is that it doesn't require any specific check-in, theft tracking or other location software to be installed, and the service cannot be disabled by an ordinary user. It doesn't look like there's any action that can be launched on a specific response in the client end (say shuitting down the device), but it offers an extremely simple way to find stolen computers. It's no defense against a wipe-and-reinstall, but for the gain it's well worth the effort.