It's highly unlikely "location" will be more than just a reverse IP-to-hostname lookup with some additional processing to further narrow location; that's usually enough to give an idea as to where the user is geographically. "Location" sounds a heck of a lot more sophisticated than just a reverse IP lookup, tho, and these quotes are supposed to be PR fodder.

As for age, gender, and wealth, I suspect it's not overly difficult to make a reasonably accurate guess for any user who visits multiple times using the same stored cookies. The "wealth" indicator is probably gleaned from the ads on which the user clicks, because some will be for products which are most frequently used by more well-to-do people (or are only affordable for such people). If you don't click on ads, however, I suspect they probably can't make a particularly good guess about it, which is why they include "sometimes" in the quote.

In my opinion, Microsoft will use the info entered when creating accounts like Hotmail. Those accounts will be moved over to Live.com and their adcenter, without any user consent (that has already happened, actually). The problem is that, indeed, the info filled in the registration form might be complete garbage, and was not in anyway meant to be reused for commercial purposes.
The conflict of interest will be automatically solved by users opting-out from Hotmail, er Live.com, if Microsoft ever implements this feature...