SMART stores various statistics about your disks. I believe taht the Palimpset disk utility is being overly pedantic. All disks have errors - thats a fact of manufacturing. Thankfully the firmware that runs your hard drive is clever enough to be able to work around errors without you even noticing them.
Take a look at this bug. Like kevmif said, the program reporting your disk as failing is being very picky. Your hard drive is designed to work around a certain amount of bad sectors, but Palimpsest will complain if you have even one bad sector.
but if you go to System>Preferences>(either Sessions or Startup Apps, or something similar), you can disable something to do with hard drives and Palimpsest will stop complaining when you log in.