Do you have to setup an AD domain… no. It is much simpler to manage systems using an AD domain, but adds a different layer of complexity in managing the AD domain. This requires that all of your systems be Windows XP Professional.
Using a workgroup requires additional work on your part to prepare a configuration and then deploy that configuration to each system.
But, first you did not say which version of Windows XP, so there are two cases.
Case 1: Windows XP Professional
You can use the Local Group Policy on one system to set up the Local Group Policy settings to your needs. You can then copy the local policy files to the target systems. Copy the entire contents of “c:windowssystem32grouppolicy” from the computer you created the local GPO to all the other systems into the same directory. Reboot to take effect.
Starting the local Group Policy Editor
START | RUN – enter GPEDIT.MSC – press enter/click OK
Note that not all domain GPO settings are available as local GPO settings and not all local GPO settings are available as domain GPO settings.
For any additional settings from the AD domain based GPO settings you can look up the setting and find the registry key for the setting. Microsoft has spreadsheets listing the AD domain GPO settings and the registry keys that are set for download. Then either create a script to set the registry settings or a reg file with the settings to be imported.
Once you have all the pieces you can then copy these to the target computer and set that computer up.
Case 2: Windows XP Home
For the Windows XP Home version your only option is to create a script or reg import to set the registry values that match the settings.
Windows XP Home cannot join an AD domain. You will need to upgrade the systems to Windows XP Professional if you go the AD domain route.
How To Use the Group Policy Editor to Manage Local Computer Policy in Windows XP