I ran into the following error message yesterday while sending email from the CRM Web Client:

bad_email_setup

This was on a CRM Professional installation with the CRM and Exchange existing on different servers.

The following article walks you through various troubleshooting steps required to determine the root cause of the issue.

How to configure the outgoing e-mail functionality in Microsoft Dynamics CRM 3.0.

In this particular case, we found that an anti-virus application had blocked port 25 which is the SMTP port that CRM uses to send email to the Exchange server.

Attempts to utilize Telnet to communicate with the Exchange server ( telnet Server_name 25 ) failed which indicated that something was blocking the communication between the two servers.  After determining that the anti-virus application was causing the issue, we reconfigured the software to open port 25 and email was flowing normally.