Have you tested this? my understanding was you only lose the ability to log into a domain. An XP box can certainly run a windows authentication SQL app. I don't think the home editions of Windows are that crippled. Just the domain, AFAIK

Yes, I have.

XP Home or XP Pro?

And yes, the home editions are that crippled. (What's confusing to some is that you can run IIS on Home Premium)

There are just too many limitations with Home Premium. The limitations may be scattered (can't prototype with Sharepoint, can't download third party database apps and test them if they rely on windows authentication, issues prototyping with certain versions of SSRS), but many professional developers will likely hit a wall somewhere.