Exchange 2010 Organization Prerequisites Fail - The forest functional level of the current Active Directory forest is not Windows Server 2003 native or later.

If you get this error during Exchange 2010 Setup Prerequisites check:

Organization Prerequisites
Failed

Error:
The forest functional level of the current Active Directory forest is not Windows Server 2003 native or later. To install Exchange Server 2010, the forest functional level must be at least Windows Server 2003 native.

Warning:
Setup is going to prepare the organization for Exchange 2010 by using 'Setup /PrepareAD'. No Exchange 2007 server roles have been detected in this topology. After this operation, you will not be able to install any Exchange 2007 server roles.

Logon to your domain controller, open Active Directory Domains And Trusts, right-click on Active Directory Domains And Trusts and choose Raise Forest Functional Level...

Raise it to at least Windows Server 2003.

Wait a while for changes to replicate to other DCs and rerun Exchange 2010 Setup Prerequisites.