So there I was, merrily learning something new and all of a sudden the error 'Domain not at required functional level to complete action' appears - and immediately I wonder wtf a Domain Functional Level was?!
Well, its quite simple - Microsoft has used domains since NT4, and as they have released new versions of their server software (NT4, Windows 2000 and Windows 2003), the capabilities of the domain has changed.
To cope with the potential situation where domain controllers live in a mixed environment, each newer version supports the functionality of the one below it - and thats a functional level.
By default, Windows 2003 domains are created as 'Windows 2003 Interim' which sometimes shows up as 'Windows 2000 Mixed', and need to be raised to the 'Windows 2003' functional level to allow the use of some of the new capabilities. The following articles describe how to do this.
Microsoft TechNet Article "What are Active Directory Functional Levels"
Microsoft Support Article "How to raise domain and forst functional levels in Windows Server 2003"
Microsoft Technet Article "Function Levels Background Information"
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