I just found out (the hard way) about something (that I could not find documented anywhere) that should be done when you are upgrading a WIndows 2003 R2 SP1 box to SP2 if you are planning on using WDS.

If you upgrade Windows Server without belonging to a domain, WDS will NOT work when you try and configure it. You will get a very useful error instead:

WDS Error Code: 0xe0000102

which can be translated to: "You should have been on a domain prior to installing SP2!"

AFAIK, there is no turning back. I tested this theory using virtual machines and it holds - no domain, no WDS, no cigar.