Any idea how to fix "CONNECTION LOST" when loading a level from the client side? From what I can tell, it is occurring on client join when a high-quality model is being created by the client for the first time.

A subsequent re-attempt to join the server works okay. Presumably, the high-quality model has been cached by the server preventing it from hanging when it attempts to load it again.

Have you tried to increase the timeout variable (I forgot its name, sorry)?

Yes thanks, increasing dplay_timeout works! Should I pre-load (and remove on startup) entities created on the server to prevent the hanging?