coldnature - You need to be at functional level 2000 for your forest in order to install Exchange 2007.
See
for "the final word".
As for your 2k Exchange on a 2k DC, you are in for some REAL fun. You MUST to do an unattended install of Exchange 2007. The setup command I use is
setup.com /m:install /dc:myDC.myDomain.com /r:h,c,m,t /EnableLegacyOutlook /EnableErrorReporting
You'll also need to use the Shell to move mailboxes from 2000 to 2007.
The reason for both of these is because Exchange's GUI setup and EMC GUI will fail with complaints that the 2k DC doesn't meet minimum standards. Thus, you have to use Shell and UA to specify a 2003 DC. Also, your Schema Master must be a 2003 DC.
During the time that both 2000 and 2007 exist, you'll also see a ton of events in the app log about the version of the 2000 box. IIRC, those are 2116 events.
Once you've got everything moved over, and you decommission the 2000 box, the events go away.
And, NO - don't demote a DC when Exchange is on it. Doing so will permanently break Exchange.
Pat Richard, MCSE MCSA:Messaging CNA
Microsoft Exchange MVP
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