It sounds to me like your encryption is perhaps not 128 bit. Check if there is an update for your particular version of W2K, SP1 SP2 etc. I remember reading recently at Microsoft web site that there is an update for "high encryption". The immediate disconnection is a classic sign of that problem. sme needs 128 bit.
There are different DUN updates for Win98 (DUN14-98.exe) and for Win98SE (DUN14-se.exe), you have to get the correct one to get it to work.
I can connect OK through a local sme 5.1.2 to a remote sme 4.1.2. from W95B and W98SE or by dial up from standalone PC to Internet. Haven't tried W2K yet
Regards
Ray Mitchell