What I've found is this.
If I go into IE and go to an ftp site that requires authentication, I get the errror.
If I put ftp://email@example.com
then it prompts for a password and displays correctly.
If I then choose to open it in Windows Explorer I get the error again.
On Windows Vista, it is then in the folder pane, and I can right click it, select Login As, and it'll work. On Windows 7 it doesn't appear in the folder pane. I can get it to appear by using the "Add as network location" wizard, but I get the error even when using Login As.
Hope that helps,