nslookup, hostname, host oddities

[mgd]

1) freebsd 4.8, bind 8.3.4, sendmail v 8.12.8, apache 2.044

2) web server works great, can resolve from inside ok, can also send and
receive email with the following issue

3) I am trying to resolve an issue with sendmail. Regardless of the account
from which I want to send my email, the source address is always:
account at ns.domain.com. As an example, suppose I have a virtual site
domain1.com with a user account called luser. If I were to send an email
form this account it would appear in mutt or mail as: luser at ns.domain.com,
not luser at domain1.com. The hostname of my server from rc.conf is
ns.domain.com. Here are my files, with real names changed to generic.

/etc/resolv.conf
domain    domain.com
nameserver 127.0.0.1
nameserver x.x.x.x (my public IP address of the server)
nameserver y.y.y.y (dns server of my ISP)

/etc/hosts
::1        localhost localhost.domain.com
127.0.0.1     localhost
x.x.x.x     ns     ns.domain.com
x.x.x.x     ns.domain.com.

Virtusertable:
sa at domain.com  sa
@domain.com  error:nouser The User Does Not Exist
luser at domain1.com luser
@domain1.com error:nouser The User Does Not Exist

senmail.cw
domain.com
domain1.com

domain.com.fwd
$TTL 3600
@ IN SOA domain.com. sa.domain.com.  (
    20030726302 ; Serial
    21600  ; Refresh
    1800  ; Retry
    1209600  ; Expire
    432000 ) ; Minimum
 IN NS ns.domain.com.
 IN NS clgrps01.agt.net.
 IN MX 10 ns.domain.com.
 IN MX 20 smtp.telus.com.
 IN MX 30 smtp1.telus.com.
www IN A x.x.x.x
ftp IN CNAME www

domain1.com.fwd
$TTL 3600
@ IN SOA domain1.com. sa.domain.com.  (
    20030726302 ; Serial
    21600  ; Refresh
    1800  ; Retry
    1209600  ; Expire
    432000 ) ; Minimum
 IN NS ns.domain.com.
 IN NS clgrps01.agt.net.
 IN MX 10 ns.domain.com.
 IN MX 20 smtp.telus.com.
 IN MX 30 smtp1.telus.com.
www IN A x.x.x.x
ftp IN CNAME www

If I issue the command hostname, I get ns.domain.com.
If I issue the command host ns.domain.com, I get Host not found.
If I issue the command nslookup ns.domain.com, I get Server: ns.domain.com,
Address: 127.0.0.1, ns.domain.com can't find ns.domain.com. Non-existent
host/domain.
If I dig domain.com or domain1.com, I get appropriate responses.


I am thinking that my sendmail issues are related to bind/dns. Can anyone
offer suggestions as where to look to help resolve this issue?