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Every Xmas we see a ton of viri and trojans because people get new machines and do not run Windows Update before going looking for porn.
Microsofts privacy policy is on the update website, and at present doesn't install spyware, nor does it send info about your machine to Microsoft. It simply makes up a list of what you have and what you have already downloaded, then checks against whats available. [Back in win95 days it did send a list of what software and hardware you had to Microsoft but they changed tack after being publicaly critised]. The only thing that has happened with Windows Update is the most recent patch disables the ability to send userIDs and passwords as a URL http://USER:PASSWORD@www.domain.com/ In reality this was always insecure for obvious reasons, and only used to gain access to porn sites you hadn't paid for.
2) I agree with above:
it is either the Apps are looking for updates, very common now or...
you have something trying to get access everytime you open anything. Test this by running the Calculator thats built into XP, (its on the Start button inside your programs, or type CALC in Run...)
Get AdAware from www.lavasoft.nu it's free and removes non-viral nasties like tracking cookies and spyware.
3)The XP machine should have a user added to its User List that matches the Login Name of the Win98 machine. BUT XP should ALWAYS be able to access Win98 shares with no problems, on XP go to your Netword Neighbourhood and tell it to look for Machines.
On both win98 and XP you can Find/Search for computers and put in * to see all the connections.
Find out the two machines IP addresses: use the Run... from the Start button. on win98 it's WINIPCFG on XP it's CMD to get a command window then IPCONFIG /ALL
they should both be in the same series i.e. 192.168.yyy.xxx or 169.yyy.xxx.xxx (the yyy MUST be the same as well)
If you have a 169 series and a 192 then you need to change one to match the others series, the Win98 box is easier to change by far. Network Properties, TCP/IP for the network adapter)
192... series IP adresses should always have subnetmasks of 255.255.255.000
169... series IP adresses should always have subnetmasks of 255.255.000.000
-Roy