Yeah, your DNS sounds right, that's exactly how I have mine here.
With a regular SMTP Virtual Server it just has a domains section in the tree, so you can do the settings in that. But looking at Exchange, it organizes it a little differently.
You define the smart host in the default SMTP Virtual Server properties section, under the messages tab. There is a place that says forward all mail with unresolved recipients to host:
What I believe this does (IIRC), is take mail that it feels it should normally process on its own, i.e. domains that are defined in the recipient policy, and it it gets one that it doesn't have a local mailbox for, it will forward it on to the other host. So if you have the domain of your ISP set up in your recipient policy, (make sure you don't check the box that makes it responsible for all mail in the domain), then put your ISPs mail server in the forward box, and you should be good to go.
I'd imagine that this gets more complicated if you were needing to accept partial mail for several domains, and then forward the unresolved addresses on to multiple outgoing servers, but I'm not gonna try to figure it out if you don't need to do it.