The proxy desktop is related to windows Explorer freezing. If you open Task Manager you should see multiple instances of Explorer.exe. Ending the processes in Task Manager should stop the error message.
There's a rather obfuscated explanation at MSDN (http://msdn.microsoft.com/library/default.asp?url=/library/en-us/shellcc/platform/shell/reference/functions/shsetinstanceexplorer.asp), under remarks.
In addition, please untick- Windows Explorer >Tools > Folder Options > View > Launch folder windows in a separate process - and see if that helps. Having this on is supposed to increase system stability by opening each folder in a separate part of memory. But sometimes performance takes a hit and may be related to this problem. Experiment!
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