I'm writing this up here mostly because I answer this at least once a week on the msnews newsgroups. Hopefully Google will pick it up, and now, I can link to it:
The question goes something like this: “If I upgrade my forest or domain functional level to Windows 2003, can I still have NT4 or Windows 2000 member servers?”
The answer goes like this “Yes!”. Forest & domain functional levels control the OS of the domain controllers you can have in your domain only. If you have a 2000 Functional level , you can have 2000 and 2003 DCs. If you have a 2003 functional level, you can have 2003 DCs only.
If you have an Exchange 2000 organization in your AD setup, which many places do, here's the member server caveat. Microsoft added something called linked-value-replication (LVR) to Windows 2003 AD. Basically, rather than replicating the entire member attribute on agroup everytime someone is added/removed, just that single entry is replicated. This saves a ton of bandwidth when you think about a universal group with thousands of members, for example. The Recipient Update Service, which Exchange uses to do things like stamp email addresses on users depends on linked values, and it doesn't detect changes when LVR is on. LVR is only on when the whoel forest is in 2003 functional mode. The Exchange 2000 Active Directory Connector (ADC) has the same issue with regard to replicating group memberships between downlevel and v2k organizations.
There are two ways to work around this:
Run a rebuild on your RUS - this can take a long time and has the potential to overwrite custom email address changes
Install an Exchange 2003 serverion in your Exchange org and transfer the RUS to this. This is the optimal solution here if you want to goto 2003 forest mode before going to Exchange 2003.
The KB article on the Exchange issue is at http://support.microsoft.com/?kbid=831809
The KB article with all the details on functional modes - http://support.microsoft.com/kb/322692