Thank you for all the answers!

I want to narrow down my question:

From a technical point of view, obviously malware can go a long way into breaking into other computers over the relatively-relaxed security of the local network.

But assuming that no other malware is installed apart from Windows itself: does the EULA allow it to break into neighbouring Linux computers which trust the local network (for example by allowing FTP access via "/etc/hosts.allow" to the whole Class-C LAN)?

Thanks RawMustard, as I said

"Rest easy because your privacy only exists if it's uninteresting and someone has been in there and deemed your computer and web traffic to be so."

Yuyutsu - EULA is End User License Agreement, viruses, hackers etc do not take any notice of it.

Correct me if I am wrong but I think your question would be can a virus, trogan or such go from 1 computer to others on a network.

The answer would be it depends on how the other computers were setup with regard to security of accepting programs etc starting without the current users allowing them to.

All the settings being secure (especially on windows)does not guarantee you will be okay because someone could find a weakness in the system that was unknown before. That is why antivirus programs are updating them self so often.

As someone said before Linux is less of a target for hackers etc (not the NSA if they want to target you) than Windows

Hope that answers your question.

There are a number of programs people can use to be probably around 95% safe.

I use Acronis true image - you can make a backup of your computer now exactly as it is (can also make incremental backups after changes) if you get a virus etc you just restore it back to the time of the backup. There are a few programs similar but I like that one easy to use.

I do not recommend windows "system restore" by itself for little problems it is okay but any good virus maker can mess it up.

You can also use sandboxie and run the programs in it then delete all the changes made (there are some viruses that can beat this system but not many at the moment)

Also there is a program Shadow Defender it can be on when you start your computer or you can turn it on when you want, just turn it on when you restart your computer any changes made to a partition you want protected are gone.

There are also quite a number of other programs that do similar things to the above.

Missed out I do not trust windows firewall.

Dear Philip,

<<Yuyutsu - EULA is End User License Agreement, viruses, hackers etc do not take any notice of it.>>

My question was specific about Microsoft, not about viruses and hackers:

Assume that the only software installed on the computer is Windows and a few selected and trusted applications (such as E-tax). Further assume that no browsing, mail or messaging occurs on that computer (since that's how malware arrives):

My question is whether the EULA allows Microsoft to LEGALLY spy on the other computers (running Linux) on my local network.