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Hi AlienHand.
My reply suggested that the problem was not with XOOPS but with the way my MTA was rejecting my outgoing emails due to my incorrect setup.
Xoops' notification emails work (as they do here and on all my XOOPS sites). Unfortunately with current anti-spam measures in place it is difficult to write an email generating system that will cater for all email servers. This is where you will need to either configure your MTA or determine what the correct headers from XOOPS should be and modify accordingly for your site.