The problem:
A user tries to open a report from SQL Server Reporting Services using Internet Explorer. They are prompted for their username and password, despite the fact that their machine is part of an Active Directory domain. The expectation is that since the SSRS server is on the local intranet, that the logon would happen automatically.
The findings:
The server was incorrectly being assigned to the [external] Internet zone by Internet Explorer. By default, IE will not automatically log you into a website located in this zone as it would if the website was assigned to the [internal] Intranet zone.
The solution:
There are a few options to consider while figuring out a permanent solution that has the least impact:
1. See if the domain name is fully qualified (ex: server.domain.com). If so, can you get away with just the server name itself (dropping "domain.com" in this example)? By convention, URLs containing server names without a dotted-domain suffix are considered local. This is usually a change that can be made at the application-level, preventing the need to touch individual machine configurations.
2. See if "Automatically Detect Intranet Network" is enabled in IE7:
Tools > Internet Options > Security > Local Intranet Zone > Sites
If so, uncheck that box (so the other three light up and are checked) and see if this improves the detection of the internal SSRS server as being in the Local Intranet Zone (LIZ).
3. As a last resort, you could add the URL of the SSRS site to the list of sites in the LIZ.