I have a network with the vast majority of the PC running windows xp but a couple of machines running Win7. This will probably be the case for the next year or 2. Should I still use server 2008 as the DC or will 2003 work better with the XP machines?
All the snazzy new Microsoft communication/social products such as OCS (Office Communication Server "Lync") and the new Sharepoint 2010 require AD schema extensions that are much easier to manage with 2008 based servers rather than 2003 (or a mixture).
Go with the new server OS and save yourself work down the line. The administration differences between 2008 and 2003 is not large enough (beyond re-learning where they placed all the configuration options) to warrant sticking with the old operating system at this point.
You will be just fine with a Server 2008 server in the office with XP machines. Better, in fact, since 2008 will continue to be updated for longer than 2003. Also, Server 2008 has better features that will aid you in managing printers and files. Active Directory (assuming you'lll be using AD) supports XP machines great.