IE7 always bypasses proxies for “localhost” addresses. Regardless of configuration. Now when you want to use e.g. Fiddler with a local web app, this can become an issue.
If you are using IIS it’s easy, just use the local machine name instead of “localhost” (something I usually do anyways because of SSL). But Cassini doesn’t accept machine names – the (quite funny) workaround for that is to use “localhost.” (note the dot) instead. Works fine….