Well, the computers that you are connecting to, lets say from a hotel room on the internet, the DNS server from the ISP (because you would be connected via internet through one of these) handles all the DNS resoultions. When you type
www.yahoo.com - this is the DNS name for the ip address of this site. A bit confusing. So rather than you remembering the IP of yahoo, it does it for you via the DNS server on their end (the end your connected to). So the VPN would only apply to your network (think of it as a private tunnel for your access), but any computer, by default, has DNS enabled with Windows (at least with NT4, 2000, and Server). You need this, otherwise the server wont know which computers are which.