SME is your dhcp server and it belives itself to be foo.com, so it's handling the requests itself.
If your sme is not doing anything for foo.com (such as email or ftp) then the easiest thing to do is change the domain name on the server. Try bar.com. Also note that if you choose bar.com and there is already a bar.com on the internet, that won't matter becuase you haven't tried to enter bar.com in the internet's DNS structure.
Failing that, I would use the c:\windows\hosts file on each PC and add an entry that says
123.123.123.123
www.foo.comor whatever the IP address is. This may or may not be practical on your LAN, but that hosts file overrides any other DNS settings anywhere for the PC it's on. This method doesn't seem to be considered as good practice most people though.
If you don't want to mess with the clients, and you must have the SME as foo.com then you'll need to somehow mess with the configuration file in the server, there's probably a default entry somewhere that tells the server to accept
www.foo.com requests, but you'll have to do a little linux config file research at this point becuase I don't know if it'll be in a hosts file, or if it's part of bind or apache or what. This is the "best" approach because it gives you the "correct" solution to the problem, and you get to learn stuff on the way.
Cheers!