When you install the SMTP service it creates the following default folders in order to process mail:
The folder C:\inetpub\mailroot\ contains 4 folders; Badmail, Drop, Pickup & Queue.
The SMTP service will process messages in the Pickup folder as outbound messages and will attempt to deliver them.
Incoming messages intended for the local domain are placed in the Drop folder. It is very unlikely that you will require the use of the Drop folder in a real-world scenario. Messages in the Drop folder must be retrieved using an email client such as Outlook but also require POP3 server software to be installed in order to enable end-users to connect to and retrieve those messages from the Drop folder.
Messages that cannot be delivered immediately are moved from the Pickup folder to the Queue folder. The SMTP service will attempt repeatedly to deliver messages in the Queue folder. The number of times it will attempt to deliver the message is configured in the delivery tab.
Emails that could not be delivered to the intended recipient are left in the Badmail folder. After the number of attempts configured in the Delivery tab to deliver the message have not been successful, the message will be moved to the Badmail folder. Messages in the Badmail folder will remain there until administrators diagnose the cause and implement a fix.
Common causes of messages ending up in the Badmail folder are incorrect or invalid email addresses and DNS issues.
Once messages are in the Badmail folder, they can be opened up in notepad and examined. Open up the corresponding .BAD file(s) which will reveal the reason for the message delivery failure.
It is very important to clarify the distinction between a local domain and a remote domain within the SMTP settings. Choosing the wrong SMTP domain type will result in unintended results.
As stated in the Drop folder section above, a local domain is a DNS domain that is serviced by the local SMTP server.
Messages that are received by an SMTP server that are destined for email addresses within the local domain will not be looked up in DNS, they will be dumped straight to the Drop folder. In the case of most environments the SMTP server is used simply to send mail and not to handle incoming mail for that domain. If this is the case for you, do NOT enable your DNS domain as a local domain within the SMTP server.
You can specify local domains as either default or alias. There can only be one default domain. An alias domain is an alias of the default domain. If you add a new domain and configure it as the new default, the previous default changes to an alias domain.
Domains that are not designated as local are remote domains. The SMTP service looks up remote domains in DNS and will process the mail according to the settings configured for that specific remote domain.