George,

>I think my licensing is OK. The license is per server. The COM (a single instance) sits in the middle receiving update requests form users and then passing them along to SQL Server.

That's a single instance of a multi-use instanced EXE. Might make a difference in how MS interprets your compliance.

>No user connects to SQL Server directly.

And in the n-tier distributed architecture that MS is promoting no user connects to SQL Server directly. That doesn't mean that they are giving away licenses.

You *might* be better covered by using MSDE on the backend instead of SQL Server. Its licensing model probably is closer to what you need.