Overkill is in the eye of the beholder. You can acheive this. Yes Ad is
required. Look into the pricing for SBS. It may end up being a better
path than just getting Exchange. SBS will also give you ISA, to allow you
to safely publish OWA if desired.

Exchange does those things very well and it's hard to beat.

I haven't tried this lately, but this might be worth looking at
http://www.opengroupware.org/en/applications/index.html
This might as well http://mirror.open-xchange.org/ox/EN/community/

Note how they all try to emulate what Exchange already does :)

AD is required, but I think you'll see some benefits that come with it such
as management of the workstations. Some added complexity as well when it
comes to recovery etc.

iCal is a standard, but it's more about how you access the product, not the
product itself.  FWIW.

Exchange 2003 SBS has a pop retrieval method, but it might be better to have
mail delivered directly to you via DNS records. Depends on who owns the
domain name, how you want users to get mail remotely etc.

Al

Your network is tailor-made for Small Business Server 2003 with one
exception - it won't run your terminal services server in application server
mode. SBS 2000 would do that, but MS disabled the feature in SBS 2003.

Addressing your concerns:

1. It's designed to do just this, fairly affordably.
2. Powerful maybe, but fault-tolerant enough? A file server crash is a
problem, but not a very expensive one typically. A domain controller crash
is a little challenging to recover from, but not that big of a deal. An
Exchange server crash, on the other hand, gets expensive. All I really care
about is that your transaction logs are on a mirrored drive (just add a
couple of extra drives of any size to the server, mirror them, and dedicate
them to transaction logs. The logs do not require much space and are limited
to 5MB/log. They are tiny but vital should your database fail. Lastly, it is
a requirement that's not subject to discussion that the server is backed up
to tape nightly.
3. You should run dcpromo tomorrow and get your workstations in shape. With
centralized administrative and group policy control you'll find yourself
doing far less work to manage those things. AD is required and there is no
reason not to use it.
4. You won't have to support POP3 from the clients. Outlook 2003 cached mode
is your friend. If you buy SBS, by the way, you get enough Outlook 2003
licenses for everyone at no extra charge.
5. See below for a value comparison analysis of a couple of options.

So let's see... going by MSRP for all pricing as a worst case scenario
(volume license and OEM certainly are cheaper)... adding Exchange 2003 Std
wtih 5 CALs will cost you $1300 for the software, and $67*7 = $469 for the
add-on licenses. So you are looking at an implementation cost of $1769 for
adding Exchange for 12 seats. However... is that server equipped for fault
tolerancy requirement of Exchange? :-)

If you went the SBS route, which would add SharePoint into the mix at no
cost (for the users who love to share their data), you would need 10
additional licenses (sold in packs of 5 at about $460 each), or $920 roughly
and $600 SBS 2003 STD. Your implementation cost would be $1520 and you'd had
2 extra licenses (your member server running terminal services would require
a CAL) to do with as you please, as well as you'd have SharePoint as a
bonus. It also is very easy to manage.

However, as I mentioned, SBS would require its own server and may cost
substantially more for that reason if you wanted to preserve your investment
in terminal server licenses and keep the existing terminal services box as a
member server. In this analysis I used only properly licensed software as
examples.