I have found a way to fix the above problem.
I went into my aolserver/modules/tcl/sendmail.tcl file and noticed that when ns_sendmail talked to sendmail it was sending the following command
Helo AOlServer [ns_info hostname]
this isnt allowed by sendmail as it doesnt accept the space in the domain name. I changed this to
Helo [ns_info hostname]
and all works fine.
Should this be changed in the dist of AOLServer?
I am not sure if the SMTP protocol allows a space in the domain, but maybe it should be changed so that it always works with sendmail.
David