>>OK, the next step would be to disable the McAfee firewall and see if that makes a difference. If you have broadband and don't have a hardware firewall you should probably disconnect your machine from the Internet during these tests.
>>
>>Here's another question - did you install SP2 after installing the McAfee suite, including the firewall? If so, you might try uninstalling, then reinstalling McAfee as its firewall may have been installed in a mode that is not SP2-compatible, or may not be SP2-compatible at all without updates.
>>
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>You've indirectly helped me pinpoint the problem! It's not the firewall at all, but the broadband connection. When I'm connected, it doesn't work. Turn off my connection and it works great! Now, how do you explain that? ;-)

When you're connected, you have access to your ISP's DNS servers. If for some reason they are resolving the name "localhost" to something other than 127.0.0.1 that could be the problem. Try running in a command window:

nslookup localhost

You should get either "can't find" or possibly 127.0.0.1. If it's something else that's likely where the problem lies.

You might also want to check your local TCP/IP WINS setting, specifically "Enable LMHOSTS lookup" which should probably be enabled for your HOSTS file to be active.