Mailbox unavailable. The server response was: 5.7.1 Unable to relay

What version of Exchange are you dealing with?

Do webserver installed SMTP service on it.
Add the exchange ip as a smarthost in webserver smtp.

I am using exchange 2003, sorry I should have posted that.  I do not have access to the webserver, but I don't think the webserver is the problem since it works fine when I allow relaying on the exchange server.

Here is the way it have it set where it works.  In Exchange 2003, under administrative groups, under servers, I go to properties of the Default SMTP virtual server and go to the access tab.  I have the "all except the list below" selected and the list is blank.  I have the "Allow all computers which successfully authenticate to relay, regardless of the list above" checked.  this way it works, but I do not like to do this because it means that any users on the network can send mail thru the mail server (ie Malware, Viruses).

I would like to just allow certain computers on the list to relay, I add the mail server and the webserver (which is not on the local LAN, its at a different location), but when I do this the webserver cannot send mail and gets the unable to relay error.

Thanks again for the help.

You definitely don't want to leave the "all except the list below" selected as this makes you an open relay - very very bad.

To find out the IP address of the webserver, or at least what it looks like to your Exchange server when it connects, you can either look at the headers of a message that was sent successfully or you can turn logging on.  To turn logging on:

On the General tab of the SMTP virtual server, click "Enable Logging" at the bottom - probably the most important thing to do here is to click on Properties, click the Advanced Tab and make sure you have enough items selected to log - ClientIP being the most important.  I usually just turn all of them on.