JSI Tip 10069. You receive a SV_PROBLEM_WILL_NOT_PERFORM error when you attempt to raise the domain functional level to Windows Server 2003 on a domain controller that is running Windows Server 2003 Service Pack 1?

Microsoft Knowledge Base Article 895139 Describes an issue where you experience errors when you try to raise the domian functional level on a computer that is running Windows 2003 with Service Pack 1 installed.