Exchange 2007 Transport rule only works on SMTP

We've setup a transport rule to catch mail sent to people that have left the company. We've then created Exchange contacts for the mailboxes that were closed and so we can refer to them from the rule using "people".

We even created a special DSN for our custom Enhanced Status Code and set the rule up so it'll use the special DSN code instead of the standard error message exchange returns. This works perfectly when sending email from outside of the domain. but when sending emails locally, a different error is given, and Exchange simply returned the misssing mailbox error.

Is there another way? something we've overlooked? the transport rule seem to be looking up an email address (user@domain formatted) while exchange and outlook clients use a different one?