authentication and java applet issues?

We're getting issues with uploading of images using the Java version of the tool. We're currently running an older version...not an option to upgrade right now either. We've recently changed authentication to the upload site using IIS authentication and turning off anonymous access on the server to the entire directory in which the uploader resides. When we try to upload photos now, we get a prompt that appears which is asking for domain, username, and password. Here's what we can see so far...but not sure what to do about it:

Aurigma ImageUploader version: 5.5.6.0
Current document URL: http://domain.com/admin/imagegallery/uploader/
Reading cookies
Cookies: ASPSESSIONIDAAQDQCAS=GDNDLAKBOHHLMMNEIPFBKCDA
Reading referer
Referer: http://domain.com/admin/imagegallery/uploader/
Thumbnail version: 5.5.6.0
Unspecified error invoking method or accessing property "ImageUploader_BeforeUpload"
Form element:<hidden><randomDir><xCs17JI77P_06_30_2010>
Form element:<hidden><username><jgibbs>
Additional form processing done
Uploading to http://domain.com/admin/...ery/uploader/upload.aspx
Setting HTTP params: Host=domain.com
Cookies:<ASPSESSIONIDAAQDQCAS=GDNDLAKBOHHLMMNEIPFBKCDA>
Starting upload
Jun 30, 2010 9:43:24 AM org.apache.commons.httpclient.auth.AuthChallengeProcessor selectAuthScheme
INFO: ntlm authentication scheme selected
Authorization request received. Host:internal.usgs.gov; Port:80; AuthScheme:org.apache.commons.httpclient.auth.NTLMScheme@190c99; Proxy:false
Jun 30, 2010 9:43:32 AM org.apache.commons.httpclient.HttpMethodDirector promptForCredentials

Any ideas what could be the problem?