http://www.sbslinks.com/DNS_Smarthost.htm
Exchange server Smart host vs. External DNS address
http://community.spiceworks.com/topic/101560-exchange-server-smart-host-vs-external-dns-address
Typically you would use the Smarthost entry for some sort of outbound mail relay. The mail should flow without that filled in. Your internal dns should forward anything it cannot resolve out to the internet for resolution. You’ll definately want to correct those dns settings in ISA too.