Exchange 2007 mail delivery failed, using POP 3 connector

We have an exchange 2007 server using a POP3 connector on SBS 2007 with RWW providing connectivity and email for users.

We have the client workstations connected to the exchange server thru an exchange connection. Each of the user's accounts that we have setup have an email account thru our corporate 3rd party web hosting, although not every email user has a local account. Everything is working correctly, until today when one of the users tried sending a message to another user who only has an email account on the 3rd party hosting, not an account on the exchange server.

This is the error message:
********************************************************************

Delivery has failed to these recipients or distribution lists:
 
user2@domain.com
The recipient's e-mail address was not found in the recipient's e-mail system. Microsoft Exchange will not try to redeliver this message for you. Please check the e-mail address and try resending this message, or provide the following diagnostic text to your system administrator.

Diagnostic information for administrators:
 
Generating server: SERVER.domain.local
 
user2@domain.com
#550 5.1.1 RESOLVER.ADR.RecipNotFound; not found ##
 
Original message headers:
 
Received: from SERVER.domain.local ([fe80::4156:8c49:8aa8:f521])
 by SERVER.domain.local ([fe80::4156:8c49:8aa8:f521%10]) with
 mapi; Tue, 3 Nov 2009 10:59:33 -0600
Content-Type: application/ms-tnef; name="winmail.dat"
Content-Transfer-Encoding: binary
From: User 1 <user1@domain.com>
To: "user2@domain.com" <user2@domain.com>
Date: Tue, 3 Nov 2009 10:59:30 -0600
Subject: Test
Thread-Topic: Test
Thread-Index: AcpcpwI6GVA9JS1qR4OhFxkNIy6tWg==
Message-ID: <2983201CCEA65744B65F3287E066A1A4E6467F49@SERVER.domain.local>
Accept-Language: en-US
Content-Language: en-US
X-MS-Has-Attach:
X-MS-TNEF-Correlator: <2983201CCEA65744B65F3287E066A1A4E6467F49@SERVER.domain.local>
MIME-Version: 1.0