The problem is the NTLM authentication, for some reason you can't connect to a windows domain controller ( I assume that the windows 2k3 server is a DC) when you try to connect to a windows 2k3 member server it will work fine.
I've used the following work-around:
Create an information bay (e.g. sme-backup)
Create a backup job and use the network share on your SME server mentioned as above.
Exclude this information bay in the backup job.
Use NT backup or other backupsoftware on your Windows server and backup the network share on your SME server.
Why the exlusion?
Because u will create a backup from a backup from... etc, in no time (I mean several days!!!)a server which contains e.g. 2Gb of data will have a backup file of 20 Gb

Regards,
Ronald