Quick simple explanation:  

Address A gets sent to address B. Address B sends a request back to address A to find out if it's a valid address. Address A acknowledges the request and the message gets delivered. If address A fails, the message is not accepted.

• A to B (send message)
• B to A (verify message)
• A to B (deliver message)

Standards on the Web

The web works on standard protocols. Technical rules for all of our computers and servers to communicate with each other.  These standards have been in place for a long time, but not everyone follows them. And we end up with problems.

(following excerpt from ServerTune:)

In theory sender callouts or callbacks should help with spam. Since sender verify callout is enabled on your server, when email comes, your server calls back, and checks to see if the address used as the envelope sender in the e-mail accepts email. This is a case where sender callbacks will interfere with regular mail delivery is if a mail server is not accepting mail from the null sender as per RFC 1123. Exim uses the null sender as part of the sender verifying process. A lot of mail servers will just blindly reject any mail stating to be from the null sender. Whether or not this is warranted is left up for another discussion, but the fact remains that if a mail server is rejecting mail from the null sender then it is breaking RFC 1123.

I am of the thinking that one should follow RFC standards as best as you can, just because there has to be some form of standardization with communication or else you run the risk of some communications working and some not if no standard is followed.

Never-the-less, since sender callouts is enabled on your server, then mail from domains whose mail server rejects the null sender, those messages will not be accepted by your server. Unfortunately, there are many companies who will send out messages from or use a nonexistant address because they do not want to receive any reply backs. Now you get to make a decision.

Do you enable sender callouts or not? If you disable sender callouts, then you will likely receive more spam and your users may inquire about the amount of spam that they receive. If you disable sender callouts, your mail queue will also likely grow larger or email will be rejected because your mail server will be accepting more faked spam messages. In our opinion, all the "cons" for enabling sender verify are elements that point back to poor administration on the sender's server. However in practice, end users usually care less about defining standards and they just want to receive their messages. So there's not really a win-win situation.

Here's a link for another explanation: http://gleez.com/articles/