Problems with 802.1x MS PEAP machine and user authentication

Question

Using Microsoft PEAP 802.1x client on Windows XP SP2, if we enable machine authentication against a Windows Domain, the machine authentication is successful and the machine gets access to the network. However, when user logon occurs to the domain, contrary to the flow given in ACS and Windows documentation, no user authentication takes place.
We need to differentiate user access based on their identities. We need machine authentication only to allow users access to the domain controller and also GP implementation.
Any idea why user does not get prompted when they logon. 802.1x is configured in users profile and I have tried with both integrated and non-integrated with Domain logon (i.e. "use my windows logon name and password and domain (if any) option"
There is no record of any identity request/response in ACS after the initial machine authentication (which appears in successful authentication log)
We are using MS-CHAPv2.

Answer 1

Update...The problem of cached credentials in MS PEAP does not occur if "enable logon using Windows username and password (and domain if any) is checked. Using this option, MS PEAP always uses logged on users most current credentials.
However, using this option sends the username as "DOMAIN\USERNAME". Since we are using ACS internal database for user authentication (even though the ACS and Windows passwords are same - using an identity management system) ACS does not recognize the user.
I have tried proxy distribution with prefix stripping but it does not seem to work when it is pointing to the same ACS server on which proxy distribution is configured and which receives the request.
Any idea how the domain\ can be ignored by ACS?