One of the requirements for DLO is a Domain as the security control over what is backed up per user is linked to a domain. The client machine can be in a workgroup as long as the end user of that client has a domain login to enter into the DLO client and as long as the DLO server is in a domain.
For information DLO has it's own agent software that is linked to the logged in user. The Remote Agnet that you installed on XP is the standard Backup Exec Remote Agent that runs as a service and is not linked to the logged in user on the remote system. What this means is that the machine can be backed up without a logged in user. Where DLO needs a logged in user (or possibly a very recently logged out one with cached files waiting to backup)
Unfortunately the versions of Windows workstation that followed XP are harder to separate from the parallel server operating systems and as such we had to change the licensing requirement so that you do need a remote agent license on the media server to back them up. if you do not have such a license you will get the message that you quoted.