Try changing the port from 25 to 587, and check the box for Authentication Required.
There are discussions in many places about this problem; some advice runs along the lines of "switch off all your AV protection and disable the firewall", but that's not a good idea. The real problem seems to be that Windows Mail does not work well with non-Microsoft AV solutions :-)
If changing the port doesn't work, then this may be a problem with your ISP - someone in the Technet forums thread below reported a problem specific to Canada. Read through the thread, there's some useful advice in there.
There is a list of Windows Mail error codes at http://support.microsoft.com/kb/942495.