Not to duplicate what you already know but MSFT has been sending out smoke signals that Hotmail is being retired. Not going to allow any bad posts about that but you need to move to other email systems now.
That connector can be thwarted by many things, firewalls, UAC and even MFST.
Have pretty much the same system in desktop and laptop (Windows XP sp3, Outlook 2003, newest Outlook Connector, not the 12.1 beta, however). Just starting using Connector a couple of days ago with Hotmail account. Still seems to be working OK on laptop, but desktop began asking for log-in/password for the MAPI Hotmail account; after delete and re-install of Connector, continually reporting "network connection interrupted" (this has no effect on POP accounts, as they access just fine). Have seen other posts on other forums from similar users, but no definitive answer. So far my laptop continues to access Hotmail via Outlook 2003 just fine. Both systems use the same connection to access the net. Looking for a viable solution, is Connector simply flaky, or is there something I should look at more closely on the desktop? TIA