I have finally been able to put this issue at rest. It is actually a rather simple fix. On the client machine the MOSS url needs to be added to local intranet security settings in IE. At least each subdomain that will be accessed. The easier way would be to add http://*.domain.com.
The second piece is a registry modification. The issue occurs because of the way Vista and 7 handle WebDAV authentication with MOSS. To allow the connection to be made navigate to HKLMSYSTEMCurrentControlSetServicesWebClientParameters and add the mult-string key AuthForwardServerList. Add the same list of domains you put in Local Intranet in this location. So http://*.domain.com and https://*.domain.com. You might have to restart the client computer.
I have reproduced the problem and resolved it with these steps a number of times now.