In my recent attempts to use IIS authentication and php I discovered that browser version has a lot to do with it. On certain versions of IE the authentication works, but on others it doesn't. We also discovered that php does not know how to react in those circumstances. I am not yet sure if there is a fix for what you describe...but I know that it is frustrating.
Any version greater than 5.0 does not work with php and IIS integrated authentication.
Christopher