There are two optional hardware updates on the microsoft windows update website. One is for my keyboard (Ideazon Merc human interface something) and the other is for my processor (AMD X2 3.1Ghz). I'm reluctant to grab both, especially the processor one, as I've seen my friend getting plagued by severe problems after downloading what was listed for him. What troubles me even more is the fact that there is no update whatsoever on the AMD site concerning my processor. Only a bunch of utilities are listed. So, what should I do?

The CPU driver is probably the "AMD Processor Driver Version 1.3.2.0053 for Windows XP and Windows Server 2003 (x86 and x64)" from this page: http://www.amd.com/us-en/Processors/TechnicalResources/0,,30_182_871_9706,00.html
If you haven't downloaded it already, the "AMD Dual-Core Optimizer" is important for fixing problems with some games (such as Battlefield 2 where pings might start showing up as negative and you lag like crazy if it's not installed).

As for an answer to your question, I've never had a problem when I decided it was actually important to get hardware updates from Windows Update, but typically the official sites have newer versions.

"The CPU driver is probably the "AMD Processor Driver Version 1.3.2.0053 for Windows XP and Windows Server 2003 (x86 and x64)" from this page: http://www.amd.com/us-en/Processors/TechnicalResources/0,,30_182_871_9706,00.html
If you haven't downloaded it already, the "AMD Dual-Core Optimizer" is important for fixing problems with some games (such as Battlefield 2 where pings might start showing up as negative and you lag like crazy if it's not installed).

As for an answer to your question, I've never had a problem when I decided it was actually important to get hardware updates from Windows Update, but typically the official sites have newer versions."

It won't cause any problems, it simply adjusts a couple of settings (the main one that fixes my example is adding /usepmtimer to boot.ini)

http://support.microsoft.com/kb/895980

Do I have to keep the program running? Does it have to start at boot (msconfig) ?

Just run the dual-core optimizer once, there aren't any programs that it has to "keep running" to work.

The driver is just a driver, at least as far as I recall (running an Intel C2D now).

A start-up called "amd_dc_opt" was installed. Do I really need it enabled?

According to a forum post by the Tweakguides site owner:

The amd_dc_opt.exe doesn't actually run as a process. It is a program which seems to execute at startup, combined with the /usepmtimer line in boot.ini, and the AmdTools.sys driver in the C:\Windows\System32\Drivers directory. These use no noticeable background resources since they are very small files, and don't add anything to the process list since they run at startup, like device drivers (e.g. you don't see a process for your main graphics driver file).

I believe that the amd_dc_opt.exe fixes some issues as well, so I'd recommend leaving it enabled.

Don't do it man!

I never, ever let Windows Update do anything to my hardware drivers.  I did once or twice in the past and each time it's brought nothing but pain and suffering.

Never get driver updates from Windows Update, as they have been known to cause issues.  I always go to the manufacturer.