Modify the variable as follows, under Adminstration->Configuration->Variables:
1. smtphosts: type in the full domain name of the server where you have moodle installed(like www.yourhost.com)
2. smtpuser: type in the login ID that the admin uses on that server to check his mails.
3. smtppass: type in the password that the admin uses on that server to check his mails.