Address Spaces define the domains to which a send connector will route mail for. For example, if a Send Connector had an address space of aol.com, then with the necessary precautions, that connector would relay email only for recipients @aol.com. Most send connectors, and the connector you'll probably want to create for the scenario you describe, would want an address space of * - indicating it will route for all domains.
It is important to note that using a * will only apply to domain names Exchange does NOT control. Exchange will always locally deliver email for your local email domains, regardless of send connector configuration. You needn't worry about 'excluding' your local domain from the send connector.
A 'smart host' is essentially an SMTP server which email sent through a send connector will be relayed off. It's equivalent to using Outlook to send email via an ISP box, which usually runs on POP3 & SMTP. The other delivery method open to Exchange - the usual one - is for Exchange to look up the recipient's mail server (MX) records and deliver the email directly.
In this instance, the PGP server would be the SMTP server email must go out via, so you would set that server as the smart host on your outbound connector.
-Matt
