Witness directory location in a two-server Exchange 2010 scenario with DAG

Yes. It can be done quite well. Do a basic Exchange install on each server (Mailbox, CAS, and Hub). Setup a CAS Array and assign it to the mailbox

New-ClientAccessArray –Name “CAS Array” –Fqdn “exchange.domain.com” –Site “Default-First-Site-Name”
Set-MailboxDatabase DatabaseName -RpcClientAccessServer “exchange.domain.com”

Setup a DNS record pointing exchange.domain.com to your hardware load balancer. Then setup your DAG, create mailbox copies, and you're all done.

You also might want to check out yesterday's Exchange team blog. It doesn't talk about a single server but does go over your options for load balancing your CAS servers with ISA (now called TMG) and HLBs. http://msexchangeteam.com/archive/2010/07/20/455575.aspx

If you know it works with a Domain Admin account, I don't see the point of even trying with the local admin. If you have a specific need you're not telling us about, please update your question.

That said, you might be able to use the Run As trick when logged in as that local admin, and run the EMC or EMS as the domain admin account. Again, seems kinda pointless though.

Update in response to comment:

Your local admin is just that - a local admin. Exchange is a domain resource, and permission is controlled with domain accounts. Since Exchange requires Active Directory to function properly, you wouldn't do very well troubleshooting if there was no domain connectivity anyway, since things would be failing all over the place.