Question 1:
Is it legal to do a re-shoot of the shot? considering we like the concept a lot... Looking at the cost, that's probrably the cheapest!

Cheapest, for sure, but not necessarily very ethical (and possibly illegal, depending on how thoroughly you copy the original).  You're stealing another person's idea.  But, ethics aside, this isn't a good idea.  You're not likely to produce a good image, unless you're a competent photographer.  After all, you pay photographers to take the photo because they do it better than you can . . .

Question 2:
Can I purchase RF photos and Digitally compose the image and use that for my webby and other advertising stuffs?

You may do this.  What you cannot do is then sell the composed image.  I'd also be sure to give the original photographers credit for their images.

Question 3:
Any cheaper alternatives? We're looking at about 40KUSD of licencing fees here.. that'll probrably make the photographer very very happy..
Don't know how much of it goes to him tough..

If the image is unique, or very unusual, you're not likely to find a cheaper alternative.  If you can find a similar image on the microstocks, that might be your best bet.  But, keep this in mind:  If you intend to use the image for more than just a web page, you'll need a fairly high-quality shot; if you're just using the web, the shot's quality is less important.

Depending on how large your company is, you might be able to negotiate with the photographer.  But, if your company is large, can afford the 40K, and really wants this image to market itself, you should bite the bullet and pay for the image.

I guess you're right about negotiating with the photographer. It's probrably a good approach. Is there any considerations? Is this deemed to be bypassing the stock photo site? Ethics?