Local DNS not resolving host name but will resolve FQDN

On the clients, under TCP/IP properties/Advanced/DNS, ensure that "Append primary and connection specific DNS suffixes" is selected and also that "Append parent suffixes of the primary DNS suffix" is checked.

Also, for the FQDN in System Properties, ensure that "change primary DNS suffix when domain membership changes" is checked.

Make sure "domain" is in the client's DNS suffix list. If you're only using DNS resolution in your network (i.e. no WINS), then the client needs to know how to fully qualify hostnames. Without a DNS suffix defined, it has no way of knowing that "sh-server" and "sh-server.domain" are the same thing, and your DNS server will always assume that "sh-server" is fully qualified.

On the other hand, if you're using WINS, nslookup won't help you because it only deals with DNS. One easy way to verify WINS resolution (since there isn't a standard "winslookup" type utility) is to ping the target host:

ping sh-server