I know the issue is caused by smarthost being configured on 2003,
However Im not sure how to remove it as we use the smarthost for external mail delivery.
Can someone tell me how to swap the smarthost connector to allow my public folders to replicate?
"In 2003, do you have a smarthost configured on the Default SMTP Virtual Server? If so, this is your problem. It prevents messages from being routed across the Routing Group Connector between 2003 and 2010. You will need to remove the smarthost from that and then configure an SMTP connector for outbound email.
http://support.microsoft.com/kb/265293"
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