Don't call it Bad Dog...
I don't think there is anything wrong with having a proxy server on your website. I have one on my server.
Seattle Post-Intelligencer: Computer project lands student, teacher in hot water
I don't call mine "Bad Dog". There are lots of legitimate reasons for using a proxy server giving it a name like that makes it seem more naughty than it really is.
UPDATE -- Here is Conrad's Blog entry explaining why he built "Bad Dog"
Blog247.Blogspot.com: Bad Dog
And here is his story about getting in trouble:
Blog247.Blogspot.com: BadDog is over
Sound Politics is covering this story as well:
Sound Politics: Spokane School Case Shows Weakness Of Internet Filters