Windows XP Professional supports two types of network environments in which users can share common resources, regardless of network size. A workgroup consists of a number of peer-based computers, with each maintaining its own security. A domain consists of servers that maintain centralized security and directory structures and workstations that participate in those structures
How Workgroups Work:
A Windows XP Professional workgroup is a logical grouping of 
networked computers that share resources, such as files and printers. A workgroup is also called a peer-to peer network because all computers in the workgroup can share resources as equals (peers) without requiring a dedicated server.
How Domains Work:
A domain is a logical grouping of network computers that share a central directory database. A directory database contains user 
accounts and security information for the domain. This database, which is known as the directory, is the database portion of Active Directory service—the Windows 2003 directory service.
Networking Space 