First off, I also use an old Model B 256MB as a headless device with no problems so it can be done
bobicanprogram wrote: I have the model B with a prebuilt Debian SD card all from Newark Canada.
Anytime I see the phrase "prebuilt SD card" I cringe a little

The RPF team does a lot of work to fix various issues that come to light due to so many people using it in so many ways that they never thought it would be used for!
So my first thought is to do a quick format of your SD card and reimage it with the latest image, but that's just a knee jerk reaction
bobicanprogram wrote: It won't boot with the HDMI disconnected, but it will boot with the HDMI to VGA dongle plugged into the HDMI port but not connected to anything!!!
This is where I really think the issue is, it sounds somewhat like you might have a ground issue that is being resolved by having the HDMI->VGA device plugged into the HDMI port. I'm not sure of the solution for that, but I have seen it mentioned around the forums
