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If I have network traffic between two VMs on the same Hyper-V host does the traffic actually ever leave the host server? How can I tell?

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Yes, and in fact it is very efficient between parent OS and the VM's too.

The reason is that it setups up a virtual switch which all use and pass traffic that way without needing to go via the network cards/interfaces.

alt text - From Understanding Network with Hyper-V, which is a great blog post on the topic

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