Exchange and Local SMTP Delivery Problems

This can get sort of confusing! I have an existing web host handle all of our emails… pop for incoming and smtp for outgoing. I setup exchange on our new sbs2003 server to use the pop connector to pull in email and we have setup smtp to send. Everything works great except for when you try to send to domain email addresses not in the exchange list.
For example: I have exchangeuser@mywebdomain.com.
if exchange user tries to send an email to regularuser@mywebdomain.com I get this error: “The e-mail account does not exist at the organization this message was sent to.”