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For our network, we only had problems with v5.windowsupdate.com - the windows update for Windows XP.
If that matches your symptoms, this is what worked for us --
1. Check to make sure the WinHTTP is using a proxy. In Windows2000, the update system picks up the proxy configuration from IE settings. This is no longer true in XP. At the XP command line, type "proxycfg". This will tell you if the XP box is using a proxy. If you want to import the settings from IE, type "proxycfg -u".
2. The ActiveX control that actually downloads the update is too stupid to authenticate. So, in squid.conf you have add the lines: acl windowsupdate dstdomain .windowsupdate.com http_access allow windowsupdate
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It seems it wasn't a Squid problem after all. "proxycfg -u" fixed our problems.
-Xian