1) What is the plan for integrating Theia in Eclipse Che? If i understand correctly Eclipse Che has 3 components- Dashboard, Workspace Agent and IDE. Is Theia supposed to replace the complete IDE(i.e. Orion to Theia)
Yes we are replacing the IDE: from Orion+GWT to Monaco+Theia. And you can already run a workspace based on that IDE (using "Che 7 preview" stack if you are use nightly build or "Workspace Next" if you are using Che 6.11 or 6.12).
And anyway the IDE is pluggable. When you configure a workspace you can specify the specific IDE you want to use. To make simple you can have 2 running workspaces, one using Theia and the other one GWT.
To be frank as of today our plans are to stop supporting the GWT IDE after Che 7 is released. But if others want to maintain it that will be absolutely possible and we will be happy to help making it possible.
2) I wanted to build a custom Stack in Eclipse Che and IDE extensions(customized IDE). Should i focus on Theia IDE extension instead of extending current IDE present in Eclipse Che?
I would suggest to build it as a Theia Plugin (not extension). Plugins are better because they can be installed at runtime. And we are working to make Theia Plugin development seamlessly integrated in Che. We have a bunch of examples of Theia Plugins on GitHub [1]. And we are writing the documentation to get started. The best way to get help right now is our mattermost channel [2].