Finally Microsoft is officially providing information about how they track, process and manipulate Demographic data for the Microsoft Gatineau Demographics report (view white paper here). Thanks Ian for this information!
The process is as follows:
1- Once a new user register to Windows Live or MSN a LiveID and an ANID (Anonymous ID)are generated simultaneously.
2- The ANID is derived by applying a one-way cryptographic hash function to the LiveID. A one-way cryptographic hash function ensures that there is no practical way of deriving the original value from the resulting hash value