judging by the screenie I can only assume that you are not actually connected to the game yet, even if you are the host.
Like you say, this could be a firewall problem, whereby the game will not start. Are you on a LAN or connected to the internet when starting the hotseat, as I find this makes a difference to my games.
Maybe if you waited, it would eventually work, but thats a but of a far fetched solution.
Do you have any firewalls installed? Do you use the WindowsXP built-in firewall?
Does it connect to gamespy correctly?
Are you on the local zone in the multiplayer browser when you host a game?