Domain Functional Level Error

One of the requirements for Exchange 2007 is a Domain Functional Level of "Windows Server 2003" mode or higher. The default installation of Windows Server 2003 R2 having been promoted to a domain controller using dcpromo is not in the required mode. This is the error you will get when trying to install before raising the functional level of the domain.To fix this, open Active Directory Domains and Trusts, which is located in Administrative Tools.
Right-Click on the domain name and select "Raise Domain Functional Level" Select Windows Server 2003 from the drop down and then click "Raise".


Once this is done, (it takes only a few seconds). Switch back to your installation and select "Retry".

Provided you have not got any more missing pre-requisites, the installation should go ahead.