This issue is affecting my entire network, as well.
I have approx 50/50 split between Win XP and Win 7 on desktops (150+ total). Some local, some at remote sites connecting via permanent VPN tunnels. I just took over this company's IT recently and they are not on a domain, just a workgroup.
DNS is running on the Exchange sever (I know, I know, but one problem at a time). By default, Exchange server is a domain, although it is the only server in it's domain. Server OS is Server 2008R2
Every XP can resolve against the internal DNS as well as external DNS. If internal DNS is the only entry in the desktop the XP boxes will follow the forwarders in the local DNS server without a problem (it usually isn't, but we tested that way as well
to troubleshoot).
Every Win7 box can resolve against any external DNS server I point them at, but NONE will resolve against the internal one. NONE will follow the forwarders from the internal DNS server, either. So, we get internet access just fine, but can't see our own
internal boxes by DNS lookup.
Every desktop, both XP and Win7, can ping the servers just fine by IP, and can connect to web services as long as they target the internal IP directly. ONLY XP boxes can ping by name or browse to a local server by name.
This issue effects EVERY Windows 7 box, and NONE of the XP Boxes. I can't for the life of me figure out why. Why can they all see any external DNS server just fine but not one on their own subnet?
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