I'm sure this isn't the "right" way to fix this issue...but it worked for me.
If this helps someone else figure out what the "right" way is, please post!?! Please let us know!?!
Make the proxy site completely anonymous access, and add the guest user to the IIS Worker Process Group.
I'm using Server2003...I don't know if there's even a group like that in earlier versions.
Again - if someone knows the real answer to this, please let me know!?!