1 Tried to create a database diagram of a db on development server. Error message states that ad hoc updates have not been enabled to the system catalogs.
2 When trying to save a database diagram to any other db on the development server, I do not receive any error.
3 Recently migrated from sql server 7 to sql server 2000 and on this particular db, there were errors relating to replication not being able to be turned off. (see first entry in the thread).
4 Made an assumption that since that is the only difference between the db's on development (the replication issue) that this database diagram issue may be related to that.
5 Turned off the dboption for publishing and also the ran the proc sp_removedbreplication.
6 Tried to create the diagram again, but was unable to.
7 Going to take a current backup of production db and restore to development tomorrow morning - can't take a backup right now.

In a nutshell, this is it.