for what its worth - Heres what I did to get mine working
under the 'access' tab in virtual smtp server properties
'connection is set to 'all computers except the list below' with the list being blank
under 'relay' i have 'only the ilst below' and added my ip address '192.168.0.2'
I think that was all.
but yeah from your error it sounds like you need to adjust those relay settings.