Windows 7 - User logon request when opening file from intranet site. How do I stop it

I have a website running on IIS7 and part of the applications has a document repository that works via url rewriting. 

mysite.com/documents/folder1/mydoc.doc

The users are getting a windows logon now that they are using Windows 7 and IE9. 

The files do not actually exist in the file system.  They are pushed out via http. When a user selects a file the open, save, cancel dialog appears.  When they press open it eventually asks for a logon.  (but ignoring the logon by pressing cancel seems to just let you pass through).  When go through with the save button is saves and opens with no logon request.

What is causing this? What do I do to stop it?  Some type of everyone access? 

My app pool is .NET 4.0 and running as classic and not integrated. 

Are you using anonymous authentication or windows authentication in IIS?

Windows Authentication. 
It is intermittent. Pressing cancel does not prevent the file from being downloaded.