I seek the wisdom of the possie: what are the relative benefits & drawbacks of hosted exchange or a dedicated mail server for a small business?

Very Broadly:

Benefits:
Generally cheaper than buying licenses, running servers, hiring staff etc
Little technical knowledge required to get going
Few ongoing responsibilities such as patching and upgrading etc

Drawbacks:
Less control over your own data
While uptime may be fine in general, you're at the mercy of the provider
May not scale so well as time goes on (Though this isn't necessarily true)
Less scope to customise and tweak the servers to your needs
You may struggle to integrate with 3rd party services

All in all, for a small business with limited on-site technical knowledge I'd say a hosted solution is the way to go. E-Mail is seen as business critical now, so it's important to have a stable and consistent service.

My advice would be to have a look at the Office 365 stuff as a first step.

Ta very much Dan.

What Dan said. We (40-odd people who make a living doing computery things with a variety of Enterprisey Microsoft products) have just switched from having our own Exchange server to Office 365, primarily for the reasons Dan mentioned.

Thanks Kenny.

We may have to look at switching to something like that as our current provider recently 'upgraded' mail hosting with lots of ensuing problems.

Ta Smiffy.

You may also want to take a look at Google Apps, it's cheaper and works pretty dang well.

Yeah, I use it a lot myself, but I don't think it would suit the needs of the organisation I'm helping.