The "Starting DirectPlay Test Host" point is where my game first got stuck. Microsoft DirectPlay8 must have permission to access the internet through your firewall. I suggest making sure it does.
The WinXP firewall does not like older games. I don't think Microsoft like older games, truth be told. I have never used it. It is disabled on my machine. It's bad enough I have their OS hogging as much ram as I will let it. However, if that's what you have to use, then that's what you have to use. Check on how to allow certain programs to access the internet nad make sure that DirectPlay8 is in there.
Does the router/modem also have a built in firewall by any chance?
Here's what I use on my system and have not had problems connecting: WinXP (no, I haven't installed the service pack yet. Yes, I know I should have), LinkSys 2.4 router, Zonelabs ZoneAlarm firewall. WinXP firewall is disabled, Internet Connection Sharing is disabled. My PC sits in the DMZ of the router and I have had no problems with hackers. ZoneAlarm does seem to do a good job of keeping them out.
On a side note, my belief that MicroSoft will never put out software that takes the end user into consideration has just been reaffirmed as they don't allow port ranges. Yeah, that's user friendly.