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How does the Windows Update feature work? What does it do?

Could you explain to me how the Windows Update feature works? I am referring specifically to the fact that when I go to Windows Update, I get the following message: "Please wait. Windows is updating the catalog for your computer. This is done without sending any information to Microsoft." So how does that work? If no info is sent, then how do they know what updates my system needs?
Windows Update installs a control on your computer, which downloads the information to your computer and decides which updates your computer needs. You see this control in %SYSTEMROOT%Downloaded Program Files. The file name is Update Class.

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