Check these instructions, also - are you on the same domain (caller and server?)
Quoting from there:
The JDBC driver supports the use of Type 2 integrated authentication on Windows operating systems through the integratedSecurity connection string property. To use integrated authentication, copy the sqljdbc_auth.dll file to a directory on the Windows system path on the computer where the JDBC driver is installed.
The sqljdbc_auth.dll files are installed in the following location:
<installation directory>\sqljdbc_<version>\<language>\auth\
Note:
If you are running a 32-bit Java Virtual Machine (JVM), use the
sqljdbc_auth.dll file in the x86
folder, even if the operating system
is the x64 version. If you are running
a 64-bit JVM on a x64 processor, use
the sqljdbc_auth.dll file in the x64
folder. If you are running a 64-bit
JVM on a IA-64 processor, use the
sqljdbc_auth.dll file in the IA64
folder.
Alternatively you can set the java.libary.path system property to specify the directory of the sqljdbc_auth.dll. For example, if the JDBC driver is installed in the default directory, you can specify the location of the DLL by using the following virtual machine (VM) argument when the Java application is started:
-Djava.library.path=C:\Microsoft SQL Server 2005 JDBC Driver\sqljdbc_<version>\enu\auth\x86
auth
directory in the JDBC driver we had. Just got version 3.0 (instead of the 1.0 that comes up first when you google it). I suppose it's gonna be better. – zneak