David,
I can attest that the combination of AOLserver + PG 7.2.3 + RH 8.0 does work.
From what you've described so far I don't think that PG is to blame. I recommend to upgrade to nspostgres-3.5. However, you could also use older versions. Try recompiling your current driver.
To compile nspostres-3.5 you simply type 'make' in the nspostgres directory. If any environment variables are missing you will get a message instructing you what to do.
/Bart