Using Civicrm 2.01 in Joomla 1.5.
-Creating search of all contacts based purely on Membership Type = Life Member
-Search returns 59 of 1249 records which is correct.
- Check 'all 59 records' and select New Smart Group
- At this point the sql syntax is displayed above the drop down list (see attached civicrm1.jpg)
- CLick 'Go' and prompted for Smart Group name
At this point the sql syntax displayed above the group name prompt omits the Membership Type = Life Member (see civicrm2.jpg)
The group is saved as Life Member Group.
When accessing the group through 'Manage Groups', selecting the Life Member Group returns all 1249 contacts.
I have tested this on your Drupal demo site and the Smart Group creation works fine. I suspect an issue with Joomla.