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I am currently setting up remote office PCs running Windows 7 Professional to authenticate back to a domain controller running Windows 2008 R2 in the headquarters. Is it possible to simply define the domain name of the domain controller using the local PC's hosts file instead of having to query a DNS server?

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Unfortunately, no. The hosts file is only a suitable replacement for proper DNS when you need host (A) records and their associated reverse lookup (PTR) records.

Active Directory also requires a bunch of SRV records to function, which you can see in your DNS setup under the _msdcs.mydomain.com DNS zone; these records cannot be set up with just a hosts file.

This article documents the necessary non-host records (in the context of setting up a BIND server to serve them)

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Shane is absolutely correct, you have to have the service records in DNS to find domain services like kerberos, ldap and DC's to authenticate to. If you have a remote office that is even badly connected to the network, you can setup a simple DNS server that simply does zone transfers from your home office and point your clients to that. – BoxerBucks Mar 13 '11 at 17:32
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