There most certainly is SSH2 support in e-smith. I've used MacSSH and SSH-Winclient with SME's ssh server and both are SSH2-only clients.
I'm not quite sure what exactly you've been trying to do, but from the look of it it's certainly different from what I did to set up public key authentication with ssh and which I've described with step-by-step instructions above. If you find these instructions unclear, please have a look at some of the other documentation available on this and other sites, which I'm sure will be very similar.
Actually, I'll just send you an email off-list.