This is still unresolved. It eventually paid for a Microsoft Technical Support issue and they have been working with my customer for a couple of weeks now. It is worth couple of hundred dollars to find out what is going on. If they ever come up with an explanation I will post it here.

I did learn that although I could duplicate it on my computer it is not exactly what my customer is experiencing. I could turn UAC (User Account Control) off on my computer and it would work. However the customer already had UAC disabled. So they have the same symptoms but a different underlying problem.

We are still getting reports from multiple customer at different universities of SQL Server connection problems of various kinds with Windows 7 using and ODBC connection over TCP/IP. (Failure to connect, frequent dropped connections) None of their XP computers are having problems. My current plan is after we exhaust everything we know to do (which is quite a bit since we have been doing this at hundreds of locations for several years) and then I will pay for the customer to have a technical support issue with Microsoft and see if they can resolve it. Hopefully we can learn what is going on so eventually we do not have to involve Microsoft since that gets expensive.

I am also considering trying the new SQL Server Native Client 10.0 drivers instead of the older ODBC drivers to see if they work better.