Incoming Email woes in SharePoint 2007

A common error you will get is "Error in the application".

If you're having problems with activating an incoming email on a list or library in WSS or MOSS (only when activating the automatic contact generation in an OU) then you probably have one of two problems.
Either you forgot to give the CA Service account enough permissions on the OU group or you don't have Exchange installed. Yes, you need exchange to use the OU feature. As SharePoint tries to add some attributes to the AD objects, and exchange makes them available.

here is a nice blog explaining some of these issues:

http://blogs.technet.com/jks/archive/2009/03/04/how-to-deal-with-an-error-in-configuring-incoming-e-mail-settings.aspx