Looking for best merger path to join two networks

We have 2 companies that just merged.  Lets call them Site1 and Site2.  Site1 is bigger but behind in the times.  Site 2 is slightly smaller and we recently upgraded them.

Site1
Windows 2000 Domain Controller
Domain Function Level is mixed mode

Site2
Windows Server 2008
Domain Function Level is Windows 2000 Native
Forest Function Level is Windows 2000

Site1 and Site2 are in two different physical locations and are joined by a VPN (SonicWall NSA2400 devices) and there is currently a two way external trust.  

When we upgraded Site 2 before the merger we knew that at some point we would need to combine the two networks but to what degree we were not sure.  Site2 was part of a larger organization so we created a new domain environment for them using Windows Server 2008 on the VMWare Foundation platform.  

Site1 will host the primary (SQL based) application for the entire company (already in place) and Site2 will host an Exchange 2007 server (licenses have been purchased although not configured yet).  Both will eventually run VMWare Enterprise for High Availability using Dell Equallogic ISCSI storage if this helps in the decision making process.  

I have a few primary questions:

Would it be wise to install the Exchange server (2007 SP1 running on Server 2008 in Site2) in a situation where both sites will be using it, in a two way trust between 2008 and 2000?  If not how would you layout the upgrade path for Site1?

If I were to raise the Domain Function level on Site2 to Windows Server 2008 would this break the External Trust between the two domains since Site1 is a Windows 2000 server operating in mixed mode?

Should I continue to leave the trust between the two domains and upgrade site1 with newer domain controllers, or should I try to migrate all computer and user accounts over to Site2 and then possibly rename the domain?  I know there will be significantly more work involved with migrating but do you feel it would be worth it in the end?

Josh
joshr799Asked:
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CSSupport2007Commented:
I did a similar implementation over the summer.

Placing Exchange 2007 into site 2 should be fine.  The only issue is the users in Site 1.
Upgrading the domain controllers in Site 1 will be less work but Users in Site 1 will need an additional account created in Site 2 to access their emails. If not handled correctly it might become an administration nightmare.

If you migrate users and workstations to Site 2 and leave Site 1 as a resource domain then it will be a lot of work up front but might be the easiest to administer in the long run.

I always like having all my users in the same organization as Exchange, much easier to manage when you have multiple forest.
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