The downloadable version from Watcom C++ currently doesn't support Win32 compilation. To compile the cphost.exe program you need the full version of Watcom. You can then build cphost.exe with wmake cphost.exe.
The DirectX 9 SDK is required to build cphost.exe. However Microsoft ships its SDK with library version 6.0 whereas Watcom only handles version 5.0. You can either use the batch file below to convert the libs (with lib.exe from some MS Visual Studio) or download the libs and headers.
lib.exe DxErr8.lib /convert /link50compat /out:DxErr8.l lib.exe DxErr9.lib /convert /link50compat /out:DxErr9.l lib.exe amstrmid.lib /convert /link50compat /out:amstrmid.l lib.exe d3d8.lib /convert /link50compat /out:d3d8.l lib.exe d3d9.lib /convert /link50compat /out:d3d9.l lib.exe d3dx.lib /convert /link50compat /out:d3dx.l lib.exe d3dx8.lib /convert /link50compat /out:d3dx8.l lib.exe d3dx8d.lib /convert /link50compat /out:d3dx8d.l lib.exe d3dx8dt.lib /convert /link50compat /out:d3dx8dt.l lib.exe d3dx9.lib /convert /link50compat /out:d3dx9.l lib.exe d3dx9d.lib /convert /link50compat /out:d3dx9d.l lib.exe d3dx9dt.lib /convert /link50compat /out:d3dx9dt.l lib.exe d3dxd.lib /convert /link50compat /out:d3dxd.l lib.exe d3dxof.lib /convert /link50compat /out:d3dxof.l lib.exe ddraw.lib /convert /link50compat /out:ddraw.l lib.exe dinput.lib /convert /link50compat /out:dinput.l lib.exe dinput8.lib /convert /link50compat /out:dinput8.l lib.exe dmoguids.lib /convert /link50compat /out:dmoguids.l lib.exe dplayx.lib /convert /link50compat /out:dplayx.l lib.exe dsetup.lib /convert /link50compat /out:dsetup.l lib.exe dsound.lib /convert /link50compat /out:dsound.l lib.exe dxguid.lib /convert /link50compat /out:dxguid.l lib.exe dxtrans.lib /convert /link50compat /out:dxtrans.l lib.exe encapi.lib /convert /link50compat /out:encapi.l lib.exe ksproxy.lib /convert /link50compat /out:ksproxy.l lib.exe ksuser.lib /convert /link50compat /out:ksuser.l lib.exe msdmo.lib /convert /link50compat /out:msdmo.l lib.exe quartz.lib /convert /link50compat /out:quartz.l lib.exe strmiids.lib /convert /link50compat /out:strmiids.l del *.lib ren *.l *.lib
If you want to modify the VXD driver you need the Win98DDK. But you can not download it anymore from Microsoft. Try a search on Google for the filename 98ddk.exe.