I currently play the same way, i.e. only on L.A.N with bots. I'm not sure if you've fixed the problem yet, but here are a few suggestions:
1.) As was mentioned, make sure that the "esf" folder is in your Half Life folder just like your "tfc" folder and/or your "ricochet" folder. If it's not, then you won't be able to see ESF in the Activate Mod (Custom Game) menu.
2.) Open Half Life normally (that is, without double clicking on the ESF icon, because that links to Steam) and go into the Custom Game menu. If you have ESF in the right folder, it should show in the list of available mods. Click on it and then click Activate. The background will change to the ESF theme... so you'll probably know if you've done it correctly. [ If you want to make a working icon, make a shortcut on your desktop to Half Life and make sure that the Target line reads: C:\Sierra\Half-Life\hl.exe -console -game esf. Then right click on the icon, go to the Properties and then the Shortcut tab and click on Change Icon. Browse your ESF folder for the little Super Saiyan picture that they give you and make that the icon image. ]
3.) Go back to the main menu and click on Multiplayer. Click from there on L.A.N and create a game. Considering the fact that you're using 1.2.1 and HL version 1.1.1.0, you should be alright. I did it this way and everything is working perfectly. If you are connected to the internet when you try to start even a L.A.N game, you will receive a "Your ESF executable is out of date" error. Also, if the number of players on the main Create Game screen differs from the number of players in your Advanced Game Settings, you will crash out... but that should be common knowledge. Just something that slips some people up. Drop another post if you still can't get it to work.
This is probably way more information than you'll need... but yeah, good luck.