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We currently host our own domain controller (small company) locally on dedicated h/w. However to mitigate disaster we're considering the use of virtualisation and cloud hosting.

One thought is

Virtual primary domain controller hosted in the cloud + a local (secondary) virtualised server running in the office as a cache?

Is this possible or should I consider something else? We're happy to pay for the decent hosting and DR but this is really out of my experience.

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There is no such thing as primary/secondary domain controllers. As for your question, it would probably be cheaper to have 2 domain controllers on-site and pay for some form of cloud backup. BTW, I'm pretty sure you don't want to be mitigating disaster recovery ;) – Ben Pilbrow Nov 25 '11 at 23:48
Lol - I meant mitigate disaster :-) – Preet Sangha Nov 26 '11 at 4:14
Acutally thee is. One domain controller is special (PDC Emulator) and serves s time source.OTher roles are also assigned to specific domain controllers. They are NOT all equal. – TomTom Nov 26 '11 at 6:30
So can I virtualise the domain controllers? – Preet Sangha Nov 28 '11 at 8:58
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If security isn't a huge concern, I would recommend using Amazon's EC2 instance. If bandwidth is an issue, you could very easily use the /async switch for replication. Joe Field has an excellent article on how to host Windows Domain in the Cloud

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In theory you could configure Samba as a domain controller under GNU/Linux. With the advantage being that there are many cheap GNU/Linux Virtual Private Server (VPS) providers.

This topic interests me since I am looking to do the same thing for a windows network at a small office. I'll post back here if I find anything of interest.

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Seems like a bad suggestion. You can't do gpos from samba, and the older style would be a nightmare to maintain. – Andy Feb 8 at 18:31
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