I'm having the same problem after upgrading from 10.04 to 10.10. I've
made the changes manually in my apt.conf file (It seems to take the
proxy settings from the "System/Preferences/Network Proxy" when you
apply it globally, but it doesn't set the authentication details?)
However, this doesn't fix the problem. I can now run 'apt-get update'
but clicking "check" in the update-manager still results in the 407
error.

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update manager doesn't use proxy authentication info and gets no internet access
https://bugs.launchpad.net/bugs/651229
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