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Were you able to find a resolution to this issue?
One of our customers is experiencing a similar issue. When accessing a page with one of our applets, Internet Explorer automatically logs in with the credentials of the user who logged into the machine. If the user is in a domain different from the web server, then the authentication fails, even though the other domains are trusted domains of the web server's domain. If the user has an account in both domains, even if logged into the foreign domain, the authentication succeeds.
From these tests, it appears that the domain name is being dropped from the user credentials, causing the web server to authenticate against its own domain rather than the user's domain. This behavior is being seen in JDK 1.6 update 18 and update 20. We don't have a 1.5 client to test against.