you shouldn't install  SPS on the same server  as an
Exchange server. Install SPS on a dedicated server.

I'm not concerned about the 16gb storage limitations of having
exchange and SPS on the same machine.

Is it definitley exchange that is causing  the problem?

Exchange and SharePoint should NEVER be
installed on the same box. Product Support Services tested this
configuration and decided not to support it. Apparently, there are
serious database issues that result in hard-to-fix problems like the one
you're running  into. Best practice is to install  SharePoint on a box
that does not have Exchange installed and has never had Exchange
installed on it.

Well I'll just move some stuff around then.

Sharepoint portal server  does not do well with a number of other Microsoft
server products, including Exchange 2000, Exchange 5.5 and earlier,
Microsoft Site Server (any version), SharePoint Team Services, Microsoft
Offices extensions, Microsoft Windows 2000 Cluster service, Project 2002
server. It simply cannot be done.

See Microsoft Knowledge Base Article Q295012.

Also:

Make sure you have a clean install  of Window 2000 server  on your machine. It
cannot be a server upgraded from NT.

Beware of SQL server  as well.......

What problems are you having with SQL Server? I run both as well as .Net
and have no problem.

From MS
www.microsoft.com/mspress/books/sampchap/5000a.asp


SharePoint Portal server  and Microsoft SQL Server

If you install  SharePoint Portal Server on a computer running  SQL Server 7
or SQL Server 2000, SharePoint Portal Server upgrades the existing Microsoft
Search (MSSearch) service. In addition, SharePoint Portal Server upgrades
the full-text index format of all of the existing indexes on that computer
the next time that MSSearch starts. For the upgrade to succeed, there must
be enough disk space on the computer to accommodate 120 percent of the size
of the largest full-text index on the drive. Upgrading the full-text index
format can take several hours, depending on the number and size of the
existing indexes. During the SharePoint Portal Server setup, a message
informs you that the service will be upgraded.

Because SharePoint Portal Server upgrades MSSearch and full-text indexes, do
not install SharePoint Portal Server on a server that participates in a SQL
Server clustering environment or add a computer running SharePoint Portal
Server to a clustered environment.

You can install SQL Server on a computer already running SharePoint Portal
Server. In this instance, SQL Server uses MSSearch installed by SharePoint
Portal Server. If you remove SharePoint Portal Server from a computer that
has SQL Server installed, SharePoint Portal Server will not remove the
upgraded MSSearch because it is a shared service with SQL Server.


The VERY FIRST time I tried installing SPPS, I used a test SQL server and
ran into problems.

Yes I forgot about this. I ran it the other way. SPS then SQL Server.
All were new installs so I had no full text indexes to upgrade.

I have not had any problems with SPS running  on the same server  that has SQL. I
installed SQL first and then installed SPS which performed some upgrade to some
components of SQL but both are working fine in this environment. Now, if you try
to uninstall SPS, then you might run into some problems with SQL. But I have yet
had to do this.