I perfer WINXP because I need to demonstrate it in my presentation.

>Proxy software, you can find lots.. Use google..
I've tried and I found many of them. Are there any simple one you would suggest?

I need the data to be encrypted behind the proxy server, like IPSec, SSL.
When a packet goes in, it is encrypted and forward to the client side.
We search for any relationship between the incoming and outgoing packets.