We had problems getting to the Internet on one customer’s terminal server after removing Java 5 and installing Java 6.33.  All other terminal servers were working normally except for this one.  It appeared that the WPAD.dat file was not being utilized and all Internet traffic was trying to go out directly.
My suspicion was that this had something to do with Java, so I tried uninstalling and reinstalling Java.  This still did not fix the internet issue. [more]
I used procmon utility on a working system to review all of the file open/close functions that happen when IE tries to launch a website.   What I found in the process log was that on a working server, I would see the WPAD.dat file being opened and closed, then jsproxy.dll, and then later on jscript.dll.  On the server with the problem, I never saw jscript.dll being opened.
I used the command “regsvr32 c:\windows\system32\jscript.dll” to re-register the DLL, and Internet started working!