Hi Ramesh,
Well I don't know what we've done between us but I set the system as you said above to check things out and I ensured the Proxy User was set to 1 and then did all as per your instructions. When I checked again on the Proxy User it was still at 1!
I then closed the PC down again, this time switching it of completely, then switched on again and left things until all was running correctly then checked the Proxy User and it was still at 1 so it looks like we've had success! Perhaps the clean start and then switching everything on again has cleared whatever glich that was there. Only time will tell and I will let you know if it starts doing it again, I take it you don't want the ProcMon trace that I did last off do you?
Many thanks for all your help and patience in working this matter through and fingers crossed all will work fine now.