Firstly thank you sailorsat for the massive efforts to debug the emulator and try and troubleshoot the network component (if only someone had access to the source code ....) - also to the community for keeping this thread active for one of the best arcade games ever made.
Have recently setup another 2player Daytona emulation rig (with newer hardware ) and was really surprised to see how differently (ie worse) the network performed on the newer rig when compared to my older pair of laptops.
Update 27/4 - looks like this might of been due some funky firewall and M2 network settings (even possibly a bad cross over cable).
When I went back and reverted a bunch of settings and the performance became what it should be.
I've left most of my original post below (as it highlights some of the min specs you can play on)
Old pair of laptops (running at 640x480 @60hz resolution)
Laptop 1
2 Cores, @2.26 GHz, Penryn (was master) win7
Laptop 2
2 Cores, @1.66 GHz, Merom (was slave) winxp
2GB ram
Using a cross over cable , 100Mbit
Performed really with all the recommended settings (network sync =1 and not using the lagfix). No freezes/pauses, very minimal flickering (occasional after a few races and not enough to spoil the fun)
Pair of 'All-in-one' pc's (running at 1920x1080 @60hz)
The newer set of identical PCs however were a different story initially but thankfully now are running great.
i5-3470. @3.6 GHz win7
Cross over cable, 1gb network (but not messed with jumbo frames)
Originally the settings I carried over from the other setup resulted in the dreaded 1-2 pause people mention all over this thread but other than that the cars didn't flicker too much if at all - however the in game pause really killed the mood and seemed to happen randomly (not often but enough to make it annoying).
After turning off network sync(=0), and using the m2lagfix it was stable and removed the freezes but introduced a constant flickering of the other players car (seen from p1 and from p2). Still more playable.
I was going to investigate the differences in each pair further (thinking the slower PC for car 2 might have been a factor in the laptop setup) but when revisited this again today - managed to get it working ok
I started the setup again from scratch using the same recommended network settings as I used for the laptops (no vsync etc). It looks like it's sorted now.