The way a combination class is run depends on the teacher. Often the children are divided into the grade-level groups and the teacher works with the second-graders while the first-graders work independently, and then the groups switch and the teacher works with the first-graders while the second-graders work on their assignment. All of the children work together on various activities and projects.
The biggest problem with this is the logistical issue of trying to cover the curriculum for both grades in one year. The higher grade students often do fine, but the lower grade students can't help but hear older students working -- the next year, they feel like they have already done the work themselves. Familiarity with the curriculum, however, is not a valid reason to let a child skip the next grade.
Before you make a decision, ask to talk with the teacher who will teach the combination class next year. Ask how he plans to handle the logistics of teaching two grades at once. Keep in mind that teaching "to the middle" will shortchange both grade levels in the long run. If the answers you get are not sufficient, ask that your daughter be placed in a regular first-grade class with a teacher who will challenge her.