It appears as ifyour copy of Outlook (presumablyu on XP, judging on the image you show us) is not following the email transmission protocol described in RFC 2821.
Specifically, this is the order in which elements of an email must be sent:
Extended HELLO (EHLO) or HELLO (HELO)
MAIL (MAIL)
RECIPIENT (RCPT)
DATA (DATA)
My servers would also refuse email sent without the RCPT command before the DATA command.
Can you use any other outgoing email server with your copy of Outlook? Can you use your email server with any other email program (for example Eudora)?