Hi Noranaj,
It is not recommended that the WSS 3.0 is installed on DC, there are some issues you need to consider, refer this
article.
From your description, it seems that the second server is installed SBS 2003, if you install Windows SharePoint Service 3.0 on it, you can check this
article.
There are some differences between WSS 3.0 and SharePoint 2007, you can select which is right for you based on the required features, check the following articles.
What's a MOSS 2007 vs. WSS v3 Feature?
http://www.andrewconnell.com/blog/archive/2006/10/18/4910.aspx
Differences between WSS 3.0 and MOSS 2007
http://sharepoint.microsoft.com/blogs/GetThePoint/Lists/Posts/Post.aspx?ID=4
Thanks
Regards, Daniel