So, if I understand correctly, on your Mac clients settings are as follows:
'AppleTalk' control panel: Connect via: Ethernet
'TCP/IP' control panel: Connect via: Ethernet
Configure: Using DHCP Server
These are the only settings you need to make on the Macs and they work for me. If I go to the chooser and select AppleShare, it finds the e-smith-server (default name).
Could you tell me where it says 192.168.1.1 and 255.255.255.0 on the TCP/IP control panel, because I don't really get that part. I hope you're not running two DHCP servers on the same network. Do you remember what range you specified when you configured the e-smith DHCP server (default is from 192.168.1.66) and what local IP-address you assigned the e-smith machine (default is 192.168.1.1).