proxy section of machine.config has problems with local hosts file

[David Swanson]

I am trying to configure the proxy section of the
machine.config to handle BOTH connecting to hosts that are
not "live" but rather defined in my
winnt/system32/drivers/etc/hosts file. AND to hosts that
are "live" and must go through our proxy server.

The problem is I cannot find a configuration that works
for both. I am trying to load an xmldoc using
XMLDocument.Load(url)

This works for my locally defined hosts (provided my
internet options have put in a proxy exclude) but will not
connect to live hosts required to go through the proxy:

<proxy
usesystemdefault = "true"
/>

This works for live hosts, but fails on all my locally
defined hosts (I changed the proxyaddress for the example):

<proxy
usesystemdefault = "false"
proxyaddress = "http://myproxy.myfirm.com:80"
bypassonlocal = "true"

Is there some configuration to support both or a place
where I would have to define my hosts for .Net rather than
in winnt/system32/drivers/etc/hosts ?

Thanks, David