Domain VS Workgroup

You can go to a workgroup and remove AD for security. But you will have to duplicate all user information to every local PC and server you want the users to access.

Let say I have one server and 5 PCs, the server will have to have the exact same username and password in use on the local PC's. If the user changes their password locally, then you will have to go the stand alone server and change their password there before the user would be able to access the shares.

You could blow the server shares wide open and allow anyone on the network in to them, but thats so insecure its scary.

workgroup server for the users to log in with. Local computer policy can be used to lock down machines as needed, templates created, and loaded on other machines after the initial set up as a time saver.
If your network is 5 computers and a file server, AD may be overkill. But, if you have it, its paid for, it is a better model then workgroup.

What problems are you having in upgrading to 2k3server? If all you really need is a file server, I would reccommend something like freenas or openfiler. A linux/bsd based distro running samba. It would share files like a champ, and provide full user control/access managed from the server (webmin ftw).