Whew, moving an mvccms site to iis7 from 6 and smtp gave me some major headaches.

In a nutshell setup smtp on server 2008 as decribed here, this is all you have to do for install.

http://www.itsolutionskb.com/2008/11/installing-and-configuring-windows-server-2008-smtp-server/

THEN

You need to give the Network Service account write permissions to C:\inetpub\mailroot\Pickup. Of course this error only happens at runtime so you will see it in your error log, the log table in the database.

The code in the Code/Emails.cs specifies the delivery method as pickup although this might be nice to allow it to just come from the web.config.

The reason we are doing the delivery method as pickup is to avoid the cannot relay for problem.