DNS service can be installed in both same server or different servers.
If the environment is an Active Directory Domain (you talk about 2008 AD Server), providing they’re both member servers of the same domain.
You need to have a DNS server to be able to effectively raise to a Domain functional level.
If you don’t have one when promoting your first server, you’ll be asked to configure the DNS service in the same machine.
If you need further help, please post back.