Danny Graham had put Malky Mackay's side ahead just after the half-hour mark but Dexter Blackstock restored parity on the stroke of half-time.
Mike Williamson restored the Hornets' lead in the 76th minute before Smith extended it four minutes later.
Substitute Dele Adebola reduced Forest's deficit with three minutes remaining but as the Reds pushed forward in search of another equaliser, Watford hit them with a flowing counter-attack and debutant Tom Cleverley sealed the win.
It was end-to-end action in the opening quarter-of-an-hour as the game got off to an open start.
Reds captain Paul McKenna headed wide from Paul Anderson's cross before the latter forced Watford keeper Scott Loach into a superb save with a shot from 12 yards.
At the other end, Lee Camp had to be alert to tip Smith's shot from outside the area round a post.
Nathan Tyson and Blackstock then combined well but the former QPR striker could not apply the finishing touch and his volley cleared the crossbar.
Forest's momentum was disrupted in the 26th minute when Lewis McGugan collided with Loach and had to be stretchered off with what looked like a neck injury. He was replaced by Radoslaw Majewski.
It clearly affected the home side and Watford took full advantage by taking the lead.
Smith's first cross was blocked but the Reading target got the ball into the box at the second time of asking and Graham's downward header from six yards out beat Camp.
Forest regrouped and Wes Morgan went close to heading them level after 40 minutes before Blackstock did restore parity.
McKenna lifted the ball into the box where Blackstock controlled it on his chest and fired home from six yards.
In stark contrast, there were few goal scoring chances at the start of the second half. Scott Severin and Cleverley, signed on loan from Manchester United on Tuesday, sent shots over the crossbar.
It was not until Williamson poked home from close range after Smith's header had rebounded off the crossbar that either keeper was troubled.
A relative avalanche of chances then emerged as Smith quickly extended Watford's lead.
Adebola, a 75th-minute replacement for Blackstock, collected David McGoldrick's pass on the left-hand side of the box before coolly rolling the ball past Loach to set-up a tense finale.
But Forest were caught out and Smith turned provider with a superb pass for Cleverley who drilled the ball past Camp from 15 yards.