The subject behavior will occur if the existing domain-based DFS (Distributed File System) is on a Windows 2000 server host, and you attempt to add a new root target from a Windows Server 2003 host.
This behavior occurs because DFS connects to the registry of the target Windows Server 2003 host using the Local Service context, which does NOT have the correct registry permissions.
To fix this problem, you will have to transfer the PDC emulator FSMO role in the forest root domain to a Windows Server 2003 domain controller.
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