Am I right in thinking that domain1 shows up in Google and domain2 shows up in MSM etc?
There are many options such as creating a site that is noticable different from the other. Hopefully they are hosted on different IP addresses.
A quick and dirty solotion would be to robots.txt them both. So domain1 only disallows MS and yahoo and domain2 disallows Google. Then you can start to optimise for the respective engines. Dont cross link them :), just work on standard link building for each.
The above is one option only, which may take more work than others.
I would be interested in some other opinions on this :)
However if you are worried this may impact your serps in msn and yahoo, then why not do it by slowly adding 301 redirects to directories on site2 so that overtime the whole of site2 is redirected, and only then implement a site wide redirect.