I have got it working on a child portal.  It's a purely intranet environment, so I don't have to worry about mixed mode operation (although that will come later).  At this stage it does simple windows login although I'm not sure what happens with group membership and DNN Security roles.  It doesn't seem to be doing anything at this stage.

Two minor tips:

1.   My portal is setup in IIS as an intranet site, not a virtual directory.

2.   The child portal name is listed as an identity in IIS, as well as an alias in DNN.

3.   Anonymous access is obviously off.

For mixed mode operation you may need to consider rewriting some of the authentication stuff (what a pain!).  Hopefully in new releases of DNN these problems will be solved (and documented).

Regards

Steve T