Local Users and Groups on Windows 2008 Server

Yes, you can add local users to WSS.

In addition, I would recomend trying to work with your ISP though to see if your VM can either be disjoined from their domain or have your own domain created and managed for you. Otherwise it may end up being very difficult to manage and could potentially be vulnerable to attacks from other machines/users that are trusted which you have no control over.

SBS2008 locks you into a special version of SQL2005 that runs the WSUS database, Sharepoint, and the SBS specific database (keeps track of users, alerts, etc). It works just fine. With SBS 2008 premium you get the extra 2k8 license with a license of SQL (i think you can choose 2008 or 2005) to run your line of business app (if any) and these other databases. if you have a big enough machine, there is no reason to get premium- you'll run into 75 user limit on standard before you run into any database performance problems. you can always move the databases to dedicated disks if you want, on standard.

i don't think sharepoint 3 is compatible with SQL 2000.