Question : 2 Separate Exchange server on same subnet can't communicate

I have an Exchange Server running on W2K3 (domain1)
I have added an SBS2K3 R2 Server to the network (domain2)

They occupy the same subnet and use the same Internet connection.
Each server has it's own External DNS, MX Record, and public IP address

Mail flow works correctly for each when sending/receiving to/from outside addresses.

Mail does not flow when user@domain1 sends to user@domain2 and vice versa.

The NDR states, "This message was rejected due to the currect administrative policy by the destination server."

Please help as I need to get this working ASAP.

Answer : 2 Separate Exchange server on same subnet can't communicate

You get the same message from both servers or do you perhaps get a message from an external system that's taking the messages and failing to process them properlly (perhaps you have a smarthost configured)

On each server you should have an SMTP connector created under Routing Groups. This will allow you to specify the other domain and send email direct to the other server.

You could also do a check and tell us what, if any, restrictions there are on submitting mail to the other servers. I'm having a hard time believing you have the same rejection on two different servers.