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Migration SBS2008 to SBS2011

I am having trouble with a migration from SBS2008 to SBS2011.

Current SBS2008 is on virtual instance in HpyerV. AD, DNS, DHCP and Exchange 2007 w/no service pack is installed. The SBS2008 has SP1.  When I run Windows SBS 2008 Best Practices Analyzer, it fails on Exchange because Exchange 2007 is at base with no service packs. Exchange SP3 fails for 'Who Knows' what reason.

Option 1: Move Exchange to Office365 (Online Hosted Exchange) and then move it to the new SBS2011 server after AD, DNS & DHCP are in place.

Question 1: Would it be easier to do Option1, then kill SBS2008 and force the FSMO roles to SBS2011, followed by recreating DNS & DHCP.

I have been running into pitfalls throughout this project. Your help is greatly appreciated.
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Larry Struckmeyer MVP
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Additional question: if I migrate current Exchange 2007 (which is the major issue with migration) to the Hosted Online Exchange and turn off the Exchange portion on SBS2008 would I be able to complete the migration to SBS2011 (AD, DHCP and DNS)?
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Have you looked at the SP3 log to see why it is failing?
Reason Exchange 2007 SP3 is failing is because it is on a virtual instance in HperV and their is not enough disk space.
Increase the disk size.