I wouldn't use Windows Update for any drivers unless I had to. Like Taupo Tech says, they can (and do) screw things up. The best place for drivers is the manufacturer's website.
Tricky
Actually, that is true for Xp and sometimes with Vista. However, Windows 7 is a whole new ball game when it installs drivers or updates. They are the actual driver for the device in question. For example, if I have an Nvidia graphics card Windows update installs the same Nvidia driver that is offered on the Nvidia website. If I am updating Windows Xp drivers I use a driver software program, Driver Genius. Works like a charm every time. Be ware of many of the driver programs however. Some are simply not what they claim. DriverMax is another good one. :-)
But, if you do use Nlite, be aware that if you're slipstreaming XP, you should slipstream it in XP. Or whatever version of Windows you're slipstreaming
I have Windows 7 Ult. X64 and use Nlite often to slipstream. I personally have never had an issue and cannot imagine why an issue would arise. The process works from the Windows Xp folder which you intend to slipstream.
Win 8 supports dual monitors
That is a feature of your graphics card. Not Widows 8. I have used dual monitors in Win Xp for a long time using Nvidia gpu.
If you are still having issues with too many boot options go into msconfig while in Xp an delete the invalid entries. That will solve that instantly. :-)