Will replication disconnect my production and Reporting users.No. That what's good with replication. They can continue working. With the restore they can't.
Another question is if need to setup this on the production or reporting server. Or it would not make a difference.This question is referring to the Replication or Log shipping?
How big is the database? How fast is the network? And the disks?
You may take almost that 2h window only for backup & restore.
Since you are using SQL Server 2008 I would suggest you to think about a Replication solution.