>utilizing  an alternate SMTP server on exchange 5.5...the message was
>sent  properly to all the members of the distribution list, with only
>a nondelivery error to the one incorrect address.

That's  because the second server was not eligible to give a 550 error
for the invalid user, since it isn't the MX for the domain.

>So it seems that this is a problem with the Imail server.

Actually,  it's  a problem with Outlook, well-known at that. While the
MUA  can do so if it wants, there's little practical reason to abort a
transaction  just  because  it sees a 550 on one recipient. But that's
what's happening.

Sandy


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