Proxies are a requirement, not an option, in my opinion.
For some small schools I have setup a proxy called AllegroSurf from Rhinosoft, and I run the same product at home for the 'kids' network.
I had experimented with Squid, and although I know Linux/Unix very well, I am lazy. AllegroSurf does as much as Squid with the DansGuradian or SafeSquid add-ons, yet is configurable without hacking into conf files or having to compile anything.
I have not tried Untangle, but it does look like a really good plug-and-play open source proxy. Untangle is cool because you can add VPN, QOS, and all sorts or other stuff to it easily.
For the enterprise, WebSense is pretty much the de-facto standard. WebSense makes some 'lighter' (cheaper) products such as WebSense Express, as the enterprise products work very well, but are costly. Some people try to use Microsoft ISA, but that's never worked well, in my experience.
Proxy servers, in general, don't break things like update services, and they don't break 'normal' web pages, in general.
The only tricky part is that some web applications do not follow RFC standards, therefore a proxy will cause such a page to have issues. Typically these are only pages that do things like run java applets. For example, the kids website 'Webkinz' has a 'communicator' chat application that uses non-standard TCP ports to communicate, I had to create a firewall rule to bypass the proxy to make this one app work. When I configure a proxy, I also configure a firewall in parallel with the proxy. This way you have a back-door way of going around the proxy for devices that don't play well with the proxy (Nintendo consoles, Internet connected TVs).
Also, I learned that the Nintendo Wii console has a bug in it's HTTP implementation, such that it's connection test will not operate properly through a proxy, but I digress....
