smtp is the option where the email is sent out through your email server. Simple Mapi will send the email out through whatever email client you have on the workstation running the task (the email must be up and running at the time the task is run). If you are running reports through the nprinting service, I definately go with smtp
I have never seen that message before - at what point do you get it? when you send out a test email? clicking OK?
if you are getting the error when trying to do a test email, you may want to try and run a task that would send out the email and when you get the error, look in the nprinting task log - it may have more information
it could also be a security issue - you may need to talk with IT because an outside program is calling your email.
You could alsways try changing to simple mapi - that will validate user id/password, sent from etc to rule any of those out