FULL PRODUCT VERSION :
java version "1.7.0_05"
Java(TM) SE Runtime Environment (build 1.7.0_05-b05)
Java HotSpot(TM) Client VM (build 23.1-b03, mixed mode, sharing)

ADDITIONAL OS VERSION INFORMATION :
Windows 7 Pro SP1, 32 or 64 bit

A DESCRIPTION OF THE PROBLEM :
In Firefox (latest version, 13.0.1) and Internet Explorer 9, I'm finding that when an applet is attempted to be loaded, Java doesn't correctly attempt to use integrated authentication to the proxy server on the first attempt to download the applet. This causes a prompt to be presented. If the prompt is cancelled, Java then appears to authenticate properly without the user manually entering credentials.

REGRESSION. Last worked in version 7

STEPS TO FOLLOW TO REPRODUCE THE PROBLEM :
Open an applet, even Sun's own Java testing applet (http://www.java.com/en/download/testjava.jsp) on a computer configured to use a proxy server with integrated authentication (like Microsoft ISA).

EXPECTED VERSUS ACTUAL BEHAVIOR :
EXPECTED -
The applet should load without prompting the user to manually authenticate with the proxy server.
ACTUAL -
Java brings up an authentication prompt, even though it is told to use the browser's (Internet Options) settings. If I select cancel on this prompt, it will generally load the applet as expected. This happened in a previous release of Java 7, and my hitting cancel caused it to lock my domain account out. That is particularly bad program behavior. This happens when we test on multiple computers. Our end users try to update Java because the program nags them about updating, but it's counter productive when the software doesn't work properly in a typical locked down network environment that uses a proxy server.

REPRODUCIBILITY :
This bug can be reproduced always.

CUSTOMER SUBMITTED WORKAROUND :
Use an older version of Java (ie. version 6, which didn't have this problem). This is not a good solution because Java is frequently a target for exploits.