Is .NET upgraded as part of Windows Update?

Minor bugfix updates are pushed out automatically.

Major version updates to the CLR (nothing → 1.0, 1.0 → 1.1, 1.1 → 2 (which includes 3 and 3.5), 2 → 4) are available as optional updates. You can go in and select them in Windows Update, but they are not installed by default.

I am trying to determine the minimum version of .NET is that I can expect to find on client machines

As Raymond Chen points out, Windows is not a .NET Framework delivery channel. At a minimum, you can expect no .NET Framework.

If you're developing a program that uses the .NET Framework, you have to have a backup plan if the version of the .NET Framework you need is not installed on the computer.

...

Windows XP didn't come with any version of the .NET Framework. Windows Vista came with version 2, and Windows 7 came with version 3.5, but these were provided as optional components which were installed by default. You can go into the Programs and Features control panel to remove them.

Emphasis mine :)

Windows Update will always supply security updates and service packs for installed .NET Frameworks. This is particularly true for versions of the .NET Framework which are automatically installed on more recent versions of the operating system (Vista and 7).

If you configure Windows Update to use Microsoft Update instead of just Windows Update in Windows XP, or, if you're using Vista or 7 if you configure Windows Update to receive updates "For Windows and other products from Microsoft Update" then the .NET Frameworks which are not installed will be offered under "Optional Updates".

I always have Windows Update configured for Microsoft Updates (this allows you to get updates for Office, for example) so I'm not sure if you must be in the MU channel for non-security updates to the .NET Frameworks. Non-security updates are, unsurprisingly, listed simply as "Updates" rather than "Security updates".