Hi, I am having the same problem.
When setting up postfix for plain text authentication (eventually to use TLS) I try to use telnet and verify that it is setup correctly. Unfortuneatly it seem to always fail authentication. I think it might be due to not knowing how to authenticate. What should be in /etc/pam.d/smtpd ?
Further details (and my config files) can be found @ http://marsianman.is-a-geek.com:8000/wp
Any help would be appreciated, thanks guys.