Proxy = evil.. you should not have to do that at all.
Make sure you have installed apache and PHP correctly. It would involve installing the Apache program, then editing HTTPD.CONF and adding some lines to it to point to PHP.
Start apache.. by going to Start >> Programs >> Apache >> Start Service (or something similar depending what version and how you set it up)
A DOS window should open saying "running apache.." Leave it open! This window has to stay open for your localhost to work.
Now in your apache/htdocs/ directory, put your PHP file.
Now open iexplore and go to localhost/yourfile.php
If you still can't get it working.. uninstall Apache, and PHP.. and go to this site:
http://php.e-novative.de/ephp_download.php
and download ePHP.zip.. unzip, and install. It will automatically install Apache, PHP, Mysql, etc and get it all running for you. Read the readme.txt for more info.