During the installation of Internet Explorer 7.0, one must go through the
Windows Genuine Advantage check.
The Internet Explorer 7.0 installation is going to try and update the validation
status of your system and this is going to cause problems for systems configured
with a proxy that does basic authentication or transparent proxy servers that
prompt for authentication. Automated installations of IE7 are going to stop dead
in their tracks waiting on someone to enter a user name and password for
the proxy connection being made by WGA.
This is a known situation. As of Nov 15, 2006 a release of Internet Explorer 7.0 has been published to correct the situation with the prompt for Authentication. You will need to download the new standalone packages.
If doing IEAK you will need to synchronize your IEAK package to get the new update.
Here is the link to download latest IE7.0: