Can't enable off-line files in Windows XP

Scene:
Running windows 2003 servers within a domain.
Windows XP sp3 and I tried to enable off-line files. The options are
completely grayed out.

Went and added the reg hack as suggested by others under the
HKLM\software\microsoft\windows\currentversion\net cache. Have 4 settings all
enabled.

Group policy for this domain is left untouched from the defaults.

Where am I missing the final piece!