How to get Exchange 2003 AD to send mail to SharePoint 2007 document librar

I have a Windows 2003 AD, Exchange 2003 Server and SharePoint 2007 all in the same domain / network. The SharePoint server has a SMTP server to send and recieve mail. Sharepoint creates the groups and contacts in AD fine. I get an error when emailing these groups or contacts. Can some one help with setting this up?

Exchange Server – server.domain.local
Sharepoint – server.domain.local
Of course I have a friendly user@whatever.com