[ERROR] Setup cannot use domain controller ‘because an override is set in the registry. Run Setup again, and specify ‘/DomainController:.
When you are running /prepareschema or /PrepareAd from the Exchange 2007 SP1 server some times you may land in Above error message. This error can occur when you are set the restriction on Exchange 2007 to use specific DC by using Set-ExchangeServer command. Below link has some example on how to point Exchange 2007 to user specific GCs and DCs and also to restrict pointing to required GCs and DCs
1. You can add Schema Master domain controller to the list of Staticdomaincontrollers and StaticGlobalcatalogserver and run the setup
2. Run PrepareSchema and PrepareAd on the Server where you have not installed any Exchange server using below command
Setup.com /PrepareSchema /DomainController:SchemaMasterServer
Setup.com /PrepareAD /DomainController:SchemaMasterServer