Cyrus,
A quick experiment will show you if your W2K Server is interfering with what you are trying to do.
Setup a workstation that is only Workgroup mode (not part of the domain, but can have the workgroup name the same as your domain name on SME). Use a static IP setup for this workstation (thus bypassing the DHCP from W2K). Set your IP within your expected IP range, set the Gateway, DNS and WINS to SME.
Now, try your tests again (if you have really made a spaghetti dish of your SME settings by now, consider setting up a test server), from the new workstation.
If you find it works, then we know that the settings given out by the W2K (or the presence of the W2K in the equation) is the root of your problem.
As for the domain name on your W2K server, during installation, you would have been asked for a domain name for the server. If you used mydomain.local, fine. If you used mydomain.com (which is your actual domain), then you will likely have a problem as the W2K server also thinks it is responsible for mydomain.com (in addition to your SME server and your ISP !), hence the reason I asked you to test without the influence of the W2K server.
Kelvin