Here a articel from the microsoft KB
Issue:
When client PC's try to connect to the an FTP site from within internet explorer that requires authentication they do not get the logon box. Instead they receive an error 502.
This is an issue with Internet Explorer 7 when behind a firewall. When using machine with Internet Explorer 6 installed the logon box is displayed as expected.
Resolution:
To work round this issue do one of the following:
1. Open a Windows Explorer windows and type the
ftp://address/. The logon box will be displayed and the user can log into the site as normal
2. Enclose the username and password in the address using the following format:
ftp://username
assword@sitename/
3. Open Internet Explorer 7
a. From the Tools menu click Menu Bar
b.Type the address
ftp://sitename/
c. When the use gets the error select View and Open FTP site in Windows Explorer
This is a documented "feature" of IE7.