I tried this using "Relay mail for" and then specified the IP addresses assigned to the server so that customer web forms would be able to relay email regardless of whether the originating email was from a domain not found on our server. This option worked great for the web forms (they could send with no problem), but customers who use clients like Outlook Express, etc. could not send email - even though they DID have "Use authentication" (or similar) box in its settings checked.
Aside from the "Disable SMTP AUTH reporting" that needs to be UNchecked, are you by any chance running a firewall that prevents SMTP AUTH from being used? If the firewall prevents EHLO (typically the same as the broken firewalls that hide some/most/all of the SMTP greeting with "*****"'s), it would prevent any mailserver behind the firewall from using SMTP AUTH.
-Scott
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