Can a Windows 2008 Terminal Server operate without a DC?

If you have a DC already, you can just introduce the new TS as just TS, and leave the current DC as just AD functions, user auth, etc.  Then you can leave DC functions off, and run the two server side by side.  You can also use the older machine for a NAS, quick backups, etc.
As for the virtual, I wouldn't recommend it for your particular situation, just as the HD's will always  be your bottleneck and having two OSes, plus one of them being TS with 10 or so live users, your performance will be mediocre.  The users/owners will be expecting a improvement, and in some cases, they may experience worse performance from their new server compared to the new one.  THough you can do this from a technical point of view and many sites do such a thing.

Thanks for your comment! The whole point of the project is to migrate all services away from the old server and retire it due to ongoing issues relating to performance and reliability, mainly caused by age, so using it is not an option.

What if I just had the server running as a TS, would this work or is a DC and AD necessary in this environment? Can the TS server just be installed as a standalone server?

I am interested to why you don't think a virtual environment will work: The server will have 36Gb RAM, and 2 x Quad Core processors and if going virtual, I would have dedicated mirrored SAS drives for Vmware and 4 x SAS drives with Raid 10 configuration for VM's. Don't you think this would do the job? Admittedly, I have never run TS as a VM, so have no experience here.

Regards,
Gavin

It will work.  I just don't think you will have the same performance gains as you would think.  Processing wise and memory wise, you are more than golden.  The problem is always your hard drives.  Generally when I have production virtual servers, they are in SAN configurations.  The virtual idea will work just fine, in fact, it would be fairly easy to convert your existing machine (assuming your issues are hardware related, not OS issues), set up an esxi machine, run it in there, then simply add the new TS server.  It is just when the different users are doing their thing, your bottle neck is the hard drives.  So while your deployment will be probably faster, the end user experience will not improve much.  

From a ROI standpoint, your finance guy will generally always want to know what did he gain by buying the new server.  If you want, you can just build it anyway, test it out, and perhaps your users are not as drive hungry as mine often are.  If the prelim tests turn out good, then you can just transfer the data and go live, and you are done, if it isn't as much as you had hoped, then you can easily scrap it and install in a standard manner.  

I would rather operate in a domain environment over a workgroup environment. The virtualization penalty isn't that big for IO, so I would virtualize first, run remote desktop on the DC second, and do workgroup mode as a last resort.

Hi,

I seem to have two contrasting opinions from a virtualisation perspective, which makes it hard to decide without first running a test environment. I would agree that a domain is far better than a workgroup environment and would extend controls over the configuration of the terminals and potentially other computers being added to the network and this is my preference.

I have not had a definitive answer yet on the question to whether TS will work effectively on a workgroup rather than domain environment? I'm presuming it will work, with all User access controlled by local user accounts on the TS, although, there are obvious negatives to this from a User and Computer control perspective on the network, seamless sharing of resources and complicating the addition of future servers?

Regards,
Gavin