I haven't looked into it that far yet... the proxy server program I was using was shareware and rather hard to configure, so it's possible the problem was in our setup. I've downloaded an evaluation copy of a better proxy program and I'm going to try it out, but haven't set it up yet.
Do you know if it's possible to connect to the Hobbit Hole chat using Yahoo Messenger? That was one of the work-arounds suggested on the error page (using Messenger) but I couldn't see any way to get to the Hobbit Hole from Messenger...