The problem is IE in how it uses a hard coded proxy pac file. What was happening is IE, when the browser was launched was asking for the proxy pac file. Since you were not authenticated the http traffic would not pass. IE would ask twice before you would receive the auth proxy page. you would get the auth page, authenticate but the browser would not ask for the proxy pac file anymore so it could not forware the requests to the proxy server. The solution is to open another browser window or shut down that window and re-launch the browser after you are authenticated. By doing that it will request the proxy pac file and now that you have been authenticated the http traffic will pass.
