Thanks all for you help. Here are the results of my last testing session.

There are 2 Firewall Rules set on m0n02:
WAN Interface - allow all from all to all any port (logging enabled)
LAN Interface - allow all from all to all any port (logging disabled)

This way I think that there should be no firewall issues.
I can ping from LAN1 to LAN2 and LAN2 to LAN1 without any issues.

I tried setting up a DNS server on LAN1 (Win2k, non AD) and this helped a
little. SMEB uses qmail as the MTA, and the message  in the log
is no longer 'Couldn't Establish an SMTP Connection', but 'deferral:
CNAME_lookup_failed_temporarily'.
I googled this message and found 2 main reasons 1) qmail needs to be updated
to v1.03 (checked an it alread is) 2) DNS  Issues.

Next, I tried telnet exchangeip 25 from SMEB, but this kept timing out. When
done from LAN2, this works fine.
I then tried telnet smebip 25 from a LAN2 pc, which worked fine.
I thought that exchange/mail marshall (sorry - missed that earlier) may be
the issue, so set up Mercury Mail on a test pc.
When trying to telnet to this pc, it still times out.

SME has an option to use another pc as the mail server, instead of itself. I
set the ip of the Exchange server in here, and  the 
m0n02 firewall log shows a connection trying to happen from SMEB to Exch
Port 25, but no reply connection.
With SMEB mail server option set to the mercury pc, the firewall log showed
connections from SMEB to Mercury, and then  Mercury to SMEB
which then sent the email fine (held on mercury pc only)!

The results here have confused me somewhat, and I am at the end of what I
know to try  :(

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