For Internet Explorer 5.x: Well, it seems with every version Microsoft has to bury this a little deeper (are they trying to hide it?

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Anyway, here's the deal...
first go to "Tools", "Internet Options", then "Connections".
Select the entry for the ISP you use under "Dial-Up Settings"
(usually not LAN unless there's no ISP entry)
Click "Settings"
Next check "Use Proxy Server".
Click "Advanced"
Under the HTTP and optionally the Secure entry, enter "localhost" for host and "8080" for port.
Make sure the line that reads "Use same proxy server for all protocols" is NOT checked.
Also be sure you don't have proxy autoconfig enabled. Phew!
there, I just copy/pasted it instead.