You can still gpedit.msc and configure update settings, when pointing to local update server instead of dns canonical name use the IP address.
http:// 192.168.0.0 etc. Same applies for Outlook, set it up and supply and IP address instead of servername.
use the local gp to tell it to use your WSUS server (if you have one) to pick up the updates, if its pulling the IP from your DHCP it should be told where the DNS is, if not as amentioned use the IP address where the WSUS resides in the 'specify intranet Microsoft Update location' field found in Computer Config > Administrative templates > Windows Update
I believe there was a way to add xp home to a domain though. It involved replacing files which I think breaks EULA etc but I am sure people had a way to do it.
You can access domain resources, shared files, printers etc, but you can't have a Vista home machine managed on the domain, as I found out when a teacher brought 5 vista machines.
I don't see why you couldn't setup faux-domain access with some local group policy settings to restrict access to a local logon, then make a script to display a faux-domain logon dialogue, get the user's username and password, and map appropriate drives etc. I did this with XP home last year and it worked a treat.