Everytime I go to Tools-Options-Connections-LAN settings and mark the
box for using a proxy server my whole system freezes for about ten
minutes and after that operates extremely slowly for about an hour.
Just by clicking the box and then apply.  I have previously filled in
my proxy settings in the advanced field so it's not about that. What
could be causing this and how can I stop it from happening? I am
running XPPro/SP2

Do you need to use a proxy? If you fill in proxy details, but don't
actually have a proxy server, it will look for one, timeout, then try
to without the proxy.

-JtB

First try installing Microsoft Anti Spyware Beta (free)
and scan your entire system for malware and spyware.