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What should happen is that AB gets your proxy settings from IE and tries to send it's request to the proxy server specified - this has been the way since ABv1.3. If the proxy server responds with a "username required" response, AB prompts you for the username/password and then retires the request (Rob, can you confirm this? I thought this is what we fixed up for CV and ABv2).
Don't recall if AB can handle an autoconfigured proxy or not. What are the settings in "Internet Options->Connections->LAN Settings" section of IE? If you've got "automatically detect settings" or "use automatic configuration script" it may not work...
Cheers,
Russell.
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