I've received questions on the past regarding this issue so wanted to post this update here.
Ed Beck from our Exchange Supportability team posted an article on the Microsoft Exchange Team blog Friday with an update about Active Directory domains with single label domain names (SLD) and Exchange Server 2007 SP1. Ed states, "After investigating Exchange 2007 Service Pack 1 installed in an Active Directory domain with a Single-label Domain (SLD) name, Microsoft has changed the Setup prerequisite rule for SLDs from an Error to a Warning, thereby allowing Service Pack 1 installation to continue in SLD environments.".
An SLD is a domain name such as "contoso" instead of a fully qualified domain name (FQDN) such as "contoso.com".
There are several issues and recommendations you must be aware of to use SLDs in your environment, most notably that Exchange Server 2007 SP1 will be the last major release of Exchange Server that will support them (a list of issues and recommendations is available in the article). The next major release of Exchange Server will not support SLDs.
In order to install the next major release of Exchange Server after Exchange Server 2007 SP1, you'll need to first migrate away from your single label domain (if you're still on Exchange 2003 and haven't prepared your organization for Exchange 2007 yet, now is the time to change your domain name to an FQDN). As mentioned in the article, Microsoft strongly recommends that you move out of this configuration.
The URL to the article is http://msexchangeteam.com/archive/2008/02/15/448140.aspx. Check back here or at the Microsoft Exchange Team Blog. We'll notify you when the updated setup rules are available.