This is something the strength training community has known for awhile, but free weight squats are vastly better for performance training than smith machine squats. Additionally, since the Smith machine restricts your range of motion in one or more planes of movement (depending on the machine and exercise in question), it is inherently injurious as it leaves out the development of stabilizing muscles.

Here is a study recently published that backs this up:

Electromyographic activity was significantly higher by 34%, 26%, and 49% in the gastrocnemius, biceps femoris, and vastus medialis, respectively, during the free weight squat compared to the Smith machine squat (p < 0.05). There were no significant differences between free weight and Smith machine squat for any of the other muscles; however, the EMG averaged over all muscles during the free weight squat was 43% higher when compared to the Smith machine squat (p < 0.05). The free weight squat may be more beneficial than the Smith machine squat for individuals who are looking to strengthen plantar flexors, knee flexors, and knee extensors.

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The free weight squat may be superior to the Smith machine squat for training the major muscle groups of the legs and possibly would result in greater strength development and hypertrophy of these muscle groups with long-term training.