There are no work-arounds, there are no fixes, and no... updating to iOS 5.0.1 will not help you. This is broken and Apple needs to fix it. No "consumerisation" will not win, and our Network admin will NOT remove proxy authentication from the network to make it work. That's what Apple want me to do, and it's not happening. Here's the deal:
1. There is a difference between a HTTP proxy and a HTTPS proxy, of course, and Apple ONLY let you supply a configuration (using "Manual") for a HTTP connection. Not HTTPS. That's the problem.
2. As such, any request to a secure site (which a LOT of apps use, including Apple's own in-built ones) will fail. As soon as the connection for HTTPS is required, you will get an authentication prompt. The iPhone/iPad CAN NOT use the credentials assigned to the HTTP Proxy for the HTTPS Proxy... they are different. On a Mac (running OSX), these are definately two separate items you need to configure in the network settings and store in the KeyChain. Aple either need to write the "Manual" Proxy setting as both a HTTP and HTTPS connection (using the same KeyChain entry), or allow a HTTPS Proxy to also be specified. I favour the first option for simplicity - though it is not "standard".
3. In iOS4, Apple also supplied a "Manual" setting with a "HTTP Proxy" setting. The big difference in that case is that requests to HTTPS sites, which would require a HTTPS Proxy connection (which was not supported), were simply IGNORED or attempted to get the data using ANONYMOUS access... which in almost all enterprises with proxy servers is flat-out denied. In iOS4 your app would have a spinning wheel forever or would crash when trying to hit a HTTPS site for updates etc. In iOS4 more apps simply didn't work, but failed in a nice and quiet way. This has changed to "allowed" in iOS5, as it now is HTTPS aware and attempts to respond to Proxy auth challenges... but Apple have not provided a way to store a username and password for that connection, so you get an authentication box.
After I installed iOS5, I had my iPad on my desk all day but didn't get a chance to use it. That night I had about forty (40) of those prompts to cancel before I could use the device. Very frustrating. Even if you enter the correct username and password the million times it asks for it, you STILL get prompts... all the time. There is no good answer. If you're lucky enough to fluke a configuration and set of apps that only require HTTP connections, then you'll have no issues. That, from my experience, would be exceedingly rare.
There are three (3) possible answers here;
a) Get the network administrator to turn off authenticated proxy for the entire site. Good luck with that one.
b) Implement a solution using DHCP/TMG/Websense (or whatever your network and security products may be), or use a product like NetBox Blue. If you don't have a solution like NetBox, you'll need to set DHCP reservations for each device by MAC Address, then configure that IP Range to be "unauthenticated" in terms of the proxy server/firewall, and then specify the range an a set of categories for that new typ of conenction (if using web filtering). That will let you do MAC address authentication and bypass the authenticated proxy. This is what we've had to do - and it *****.
c) Wait for Apple to fix the issue. Like I said earlier, they'll either need to repurpose the "HTTP Proxy" option as "HTTP(S) Proxy" and allow HTTPS challenge responses to proxies via the one KeyChain item... or supply a second "HTTPS Proxy" option we can specify under "Manual". It's a fault in their software. To be honest... I preferred it when HTTPS traffic was just blocked (as in iOS4).