Windows share through proxy

Think your DHCP options may be off... From: http://www.wlug.org.nz/WPAD

Add the following to your /etc/dhcpd.conf:

option option-252
"http://wpad.host.co.nz/proxy.pac";

With ISC DHCP v3+, option-# options don't work. You have to do this in the global section of your configuration:

option wpad-url code 252 = text;
(define a new option)

And add this in either the global or appropriate subnet section(s) of your configuration:

option wpad-url
"http://wpad.my.domain.tld/proxy.pac\n"; (use new option)

Also, you will find that auth in transparent mode in squid is not really possible. Some commercial web filters do work around this (indeed I work for SmoothWall, one such filter).

proxycfg -p <proxy>:<port> <bypass list>

UPDATE: We see

2011-09-23      15:52:23:843     372    11c     Agent     * Access type: Named proxy
2011-09-23      15:52:23:843     372    11c     Agent     * Default proxy: 192.168.1.2:3128
2011-09-23      15:52:23:843     372    11c     Agent     * Default proxy bypass: *.local;<local>

in Windowsupdate.log, so it's configured to use proxy. Check if proxy is available from updated machine with telnet 192.168.1.2 3128 and search squid logs, the answer must be there