The SMART detection goes off of certain properties that the drives performs upon startup. I honestly don't know that much about it but it does basic checks for things like how long it takes for the spindles to start-up. If something is outside of the normal values that would cause it to trigger an error.
I would have to say it would probably be in your best interest to replace the hard drive. The main thing is that everything might be working right now, and it might work for say another 6 months fine, then all of the sudden everything dies and you can't recover anything. By being proactive you won't be in that position later.
What brand of HDD is it?
You can run diagnostic tools in windows from several vendors by finding their software.
Seagate / Maxtor: http://www.seagate.com/www/en-us/sup...oads/seatools/
Hitachi / IBM: http://www.hitachigst.com/hdd/support/download.htm