Airport Express gives out strong signal and IP address, but no Internet

I'm trying to solve an Airport problem for a friend who has an Airport Extreme (802.11g) and an Airport Express. The base station is connected to a cable modem. The Airport Express is used in WDS mode to extend the wireless network. There are two computers involved: a MacBook Pro and a Dell with Windows XP. The Airport Express is needed to extend the signal into the room where the Dell is located.
It had been working fine but stopped working and went into "flashing orange light" mode. I tried hard reset but that didn't help; I had to reset it to factory defaults to get it to even respond to the Airport utility.
After the reset, and after reconfiguring the Airport Express, the Airport Express cannot provide Internet access wirelessly. Here are the specific symptoms:
(a) Computers in the vicinity of the base station (both my friend's MacBook Pro and my own MacBook) can get wireless internet access
(b) The Dell detects a strong signal from the Airport Express (which is only about two feet away from the Dell's USB WiFi adapter) and gets an IP address from it, but no Internet access
(c) My own MacBook, when next to the Dell PC, also detects a strong signal from the Airport Express, but also cannot connect to the Internet
(d) If I connect my MacBook to the Airport Express with an ethernet cable, I can access the Internet
I have tried both with and without wireless encryption and it makes no difference: no wireless Internet access from the Airport Express.
Is this a configuration issue or is it a hardware problem with the Airport Express?

You are going to have to give us more information. How were your iMac and iPhones getting internet access before the AirPort Express? How was your equipment wired up before, and how is it wired up now?

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