A. This is a known problem, i.e. bug. You have to rewrite sp_processmail (courtesy of Wayne Snyder). Microsoft haven't fixed it yet - maybe in SP2....
The problem is actually with xp_sendmail which returns an error (@set_user datatype is incorrect)..
Microsoft changed the @set_user, and @dbuse params in sp_processmail to sysname, and did *NOT* go back and change xp_sendmail...
The temp fix is to change sp_processmail as follows
create procedure sp__processmail --- 1996/06/19 17:30
@set_user varchar(30)='guest', --Change this back from sysname to varchar
@dbuse varchar(30)='master' --Change this back from sysname to varchar
........./* rest of procedure */