There is the option "Enable Domain Security (Mutual Auth TLS)." So I clicked the radio button back on "Use Domain system" and unchecked it" and then swapped back to "Route mail through the following smart hosts:" Went and put in the Authentication information again and it took it this time.
Personally the settting "Enable Domain Security" since it is a subsetting of Use domain Security it should have no effect on using a smart host. If so the Setting should be set to the bottom of both. Since if you choose route mail through smart host it gray's out that setting. Wierd. This might be fixed in Exchange 2007 SP2 but I don't know. Anyways hope it helps someone else out too.