I'm having a spot of bother routing between LAN1 and LAN2. Essentially on LAN1 I have a routed set of public IP addresses and on LAN2 I have a 10/8 network. Despite having turned on Inter-LAN routing between LAN1 and LAN2 anyone with a public address cannot access any machine on the 10/8 LAN2 network. Am I missing something obvious here?

Intersubnet router ONLY works with NAT'ed IP subnets. An IP routed subnet MUST go out via a WAN connection as it is associated with a publicly routable subnet (the gateway of which will be the ISP).

Well strictly speaking, the default route of the machines on the publicly-routable subnet is the 2850n itself. It doesn't break any rules to have that route to the 10/8 network. After all a BT Voyager 2110 can do this. It makes sense to have local resources (such as printers) on a 10/8 network as they don't need Internet-available IP addresses, but if one can't route from one to the other they are invisible to the machines that do have routable addresses. If true this is a serious limitation.

This is also the express reason why the 2nd, 3rd, and 4th LOCAL subnets were added to the router. The IP routing subnet is expressly intended for direct PUBLIC routing.