Exchange 2007 error - 550 5.1.1 RESOLVER.ADR.ExRecipNotFound; not found

We migrated from Win 2003 with Exchange 2003
to SBS 2008 with Exchange 2007.

Now we get this error every time a user sends an email to another user within our domain.
External emails are OK.

Also getting a "connect to sites" prompt asking for a user name and password every time we do anything in outlook (eg start outlook or send email).

My DNS looks like this - have I set it up wrongly?
(computer names obsucred for security reasons)

 DNS Setup
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enigmasolutionsAsked:
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Viral RathodConsultantCommented:
Make sure Exchange 2007 service Pack 3 installed on the server

There was an issue with repeated password prompts that was resolved by installing Rollup 9 for Exchange 2007 SP1, however I would recommend that you should now be using Exchange 2007 SP3

Ref : http://www.experts-exchange.com/Software/Server_Software/Email_Servers/Exchange/A_2300-Outlook-continually-prompting-for-username-and-password.html

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enigmasolutionsAuthor Commented:
FYI - My primary problem was caused by having several email addresses and domains for some of my co-workers that were not transferred to the new server (eg user@aaa.com.au, sales@aaa.com.au, user@bbb.com.au, sales@bbb.com.au). But the guy who set up exchange forgot to create email addesses for all of them.  Quite simply I was sending an email to one of these addresses that wasn't linked to any user.

The "connect to sites" could have been resolved by the SP3 upgrade.

But, I was using Outlook 2007 and before I did the SP3 upgrade, I upgraded outlook on my PC from 2007 to 2010 and I think this seemed to fix the problem.  

Actually I didn't really test it much before I also applied the SP3.  So who knows?  You were probably right anyway.

Anyway.  A big thank you for your response.

THANK YOU !
enigmasolutionsAuthor Commented:
Whilst my own solutions was the correct answer on this occasion, I suspect that upgrading to SP3 may have also helped.
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