In XP, offline files is integrated with SMB protocol. So it works only for SMB shares. It can be used on DFS shares also, as DFS shares also work on SMB protocol.
Do we need to configure anything on the server machine to use offline files?
Though offline files is completely a client feature, there is one setting which can be configured on the server side too. This setting can be seen by right clicking on the shared folder and then click on Properties -> Sharing and Security… -> Caching
Here you can set the type of caching the client can have for this particular share. There are 3 options you can choose from.
If this is selected, then the files in this share will be not available offline by default. User on the client machine has to explicitly make it offline by right clicking on the share and then clicking on “Make available offline”
Users can’t mark any folder/file from this share for offline cache.
Every file opened on the client machine will be marked for offline usage. User does not need to explicitly mark the files for offline cache. Note that this works only at file level, not at folder lever. Suppose if you open a folder from a network share configured as auto cache, nothing will be cached on the client machine. Instead, if you open a file say file1.doc from the share, it will be cached in the offline folder. Only the file that is opened gets marked for offline usage.
“Optimize for performance”: when this is enabled, all the file access requests will be directed to the local copy even if the share is online. This is to increase the performance of the client machine.