Possible pitfalls of condensing 2 SQL Server instances into 1 I currently have 2 SQL Server 2000 database instances (each running on a different physical server), each containing around 12 databases (not all are active).  We are planning an upgrade to SQL Server 2008 R2, and are investigating the possibility of condensing these 2 instances into 1 for several reasons (ease of use, fewer client DSNs, cheaper licensing).  The two servers are referenced by each other as linked servers (and that link is used a lot), and there are other servers involved which are also linked servers.

I understand I'll need to refactor all the stored procedures and views which reference the linked servers, but what other potential problems should I look out for?  What should I check/do to determine if this is a good idea or not?
I believe consolidation like you are planning to do is a good thing.  Depending on how the linked servers are queried, you may find a huge jump in performance (cross server joins are usually quite horrible when compared to cross database joins on the same server).

The downside is that your entire system is now sitting on one machine.  When this machine is down, all your apps are down.

Here is what I suggest you do to prepare:

Run the SQL Server Upgrade Advisor against each database.  It will tell you of any incompatible code that may exist (e.g. "*=" join syntax, no longer supported).

Identify DTS packages running against the old systems.  DTS is no longer supported.  You will have to rewrite them using SSIS.

Make sure the new system is powerful enough to handle the workoad.