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I am advising someone on how to disable TCP Chimney Offload, which is enabled by default by Windows Server 2003 SP2. We are working in an environment with multiple server machines, namely the application server machine which communicates with the database server machine.

This can cause communication problems between application and database. See KB942861 and Windows Scalable Networking Pack - Possible Performance and Concurrency Impacts to SQL Server Workloads.

On which machine should TCP Chimney Offload be disabled? Application, database or both?

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Bit of a carbon copy of a previous answer...

Personally, I disable it at both ends of the pipe but the problem usually manifests at the database end (due to the comparatively high traffic). As described in this MSDN blog post, I would start with disabling in the OS with:

netsh int ip set chimney DISABLED

It may be necessary to disable the features at the card driver level in some cases. It certainly won't hurt to do so by default.

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