Re: [Newbie] WP Installation or WPMU installation?
The fact that you are using WP 2.9.2 means that you are in luck. WP 2.9.1 is the minimum required version of solo-blog WP (single site) that will run BuddyPress. If you do not need to offer your client multiple blogs (or more precisely, if you think that your client will never need to offer their employees and departments blogs), then you can stick with the solo-blog version of WordPress.
As far as setting up departmental pages, I would think that BuddyPress groups would be the perfect fit. But, if each department will need their own blog, then you will have to go the WP multisite route (a.k.a. WordPress Mu.)