|Work groups use Peer to Peer networking. A domain uses a File/Server network.|
A file Server network requires a dedicated server, a server OS like Windows 2000 Server or Windows 2003. It is more expensive and requires more skill and knowledge to set up, but it is more secure and there is more control over who can do what on the network.
A peer to Peer Network is easier to set up, does not require a dedicated server and can be run with any version of Windows. However it is not as secure.
You log onto a domain server you need Windows XP Prof or Windows 98. Windows XP Home cannot connect to a domain server but can connect to a domain server as a Workgroup computer in Peer to Peer mode.