Yesterday I watched the logs at the proxy. The log level is set to INFO so I can see everything that comes through.
So that makes this more interesting - when the install is given the proxy info and fails, I don't see any activity in the log.
Does that mean that it isn't ever getting there? It would make sense of the not connected error.
I'm going to make a simple 1 file installer as a test and watch the sbevents and the proxy log.

Let me know if you find anything.