I finaly managed to get squid and dansguardian working together using NTLM. But it seems to hate SSL for some reason. It throws up an error 407 in the squid access log. But squid accesses normal http sites with no problem.
Here is the set up:
Ubuntu Server 8.10
Squid 2.7 Stable 3
Clients -> Dansguardian -> Squid -> Parent proxy (E2BN Cachepilot).
Cheers peeps :)