I'm not clear from your description as to what's going on, but let me take a stab at it and we'll see if we can't zero in on the problem. I've seen where with Windows XP SP2 that the launch of the emulator looks like suspicious activity to the firewall software and it asks if you want to block the operation or not. Usually if you click unblock, things then proceed normally. This might be similar to what you're seeing.
---Tom