I managed to resolve our problem here:
The internal SMTP (windows exchange server) REQUIRES a return path email address to be there and valid email address.
I made sure that an email address was set in this file
\manager\includes\controls\class.phpmailer.php
about line 69
/**
* Sets the Sender email (Return-Path) of the message. If not empty,
* will be sent via -f to sendmail or as 'MAIL FROM' in smtp mode.
* @var string
*/
var $Sender = "myusername@mydomain_name.com";
And voila ! all is good!
So Moral of the story is to check that you are able to fulfill all the email fields properly for windows exchange servers...
