So, I noticed than no-one seems to really know what Amazon can or does do with their access to Kindles, so I asked them and this is what they said:
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As described in the section you quoted, the logfile contains "data about your Device and its interaction with the Service (such as available memory, up-time, log files and signal strength) and information related to the content on your Device and your use of it (such as automatic bookmarking of the last page read and content deletions from the Device)". The logfile is used by our technical team to diagnose any possible problems your device may have.
Annotations, bookmarks, notes, highlights are also stored by us so you can use Whispernet to synchronize that data on all your Kindle devices and applications. An example of this would be if you wanted to synchronize the furthest page read of a book you were reading on your Kindle DX, on your Kindle for iPhone.
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So, there you go!