Almost there!
 
Problem turned out to be I needed to list the virtual domains under /etc/mail/local-host-names.
 
Once I did that, I started receiving "user unknown" messages for every e-mail directed to a virtual account. Then I learned once I generated the sendmail.cf from the .mc file and not through linuxconf, my virtual accounts were no longer defined under /var/vmail. The /etc/mail/virtusertable was in charge of the job now.
 
Ok... problem solved ? Not yet.
Now the authentication does not take place at all. If I telnet to port 25 and ehlo the server I receive 250 AUTH LOGIN PLAIN.
But when I send a message with Outlook Express, no password is requested.
 
Im crying.

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