In general, the .NET Framework is used by installed applications, not core XP functions. If you remove it, XP itself should be OK, but the application(s) that want it would stop working.
Updates are not normally shown in Add/Remove because there are so many of them, but there is a "show updates" checkbox.
If you have several machines to update, or problems with the automatic update, it's probably better to go to Microsoft's Downloads page and get the latest .NET Framework packages, then apply them.