IIS 6.0 Authentication Model: An important part of  many distributed applications is the ability to identify   someone,  known as a principal or client, and to control the client’s access   to  resources. Authentication is the act of validating a client’s identity.  Generally,   clients must present some form of evidence, known as  credentials, proving who   they are for authentication. Typically,  credentials include a username/password   pair.
SharePoint Portal 2003 is built upon IIS 6.0. Lets first take a look at the   authentication model of IIS.
IIS provides a variety of authentication schemes:
Anonymous (enabled by default):
Anonymous authentication allows a user to access web and FTP sites  without having   to provide a username and password. When a client user  accesses a web or FTP   site, IIS uses the Internet Guest Account to  authenticate that user.
The Internet Guest Account is created when IIS is installed, and it  is named   IUSR_, where  is the  name of the host   machine. Having an account to use for anonymous  access allows you to configure   which resources all anonymous users can  access on your server. The anonymous   account is also added to the  Guests group when IIS is installed, so any restrictions   or permissions  applied to that group also apply to the account.  
Basic Authentication:
When a server uses Basic Authentication, the Web browser (or the FrontPage client) prompts the user for a name and password. The user name and password are then transmitted across HTTP, in clear text. Using this user name and password, IIS authenticates the corresponding Windows NT user.
To use Basic authentication, a user account must be defined on either the local machine or on a trusted domain controller. The account-based access control is all done through the NT File System (NTFS) permissions on the file system.
When a server uses Basic Authentication, the Web browser (or the FrontPage client) prompts the user for a name and password. The user name and password are then transmitted across HTTP, in clear text. Using this user name and password, IIS authenticates the corresponding Windows NT user.
To use Basic authentication, a user account must be defined on either the local machine or on a trusted domain controller. The account-based access control is all done through the NT File System (NTFS) permissions on the file system.
Integrated Windows authentication: 
Integrated Windows authentication is the most secure method of authentication, but it is available only with Internet Explorer. In Integrated Windows authentication, the user’s browser proves itself to the server using a cryptographic exchange during the authentication process.
Integrated Windows authentication is the most secure method of authentication, but it is available only with Internet Explorer. In Integrated Windows authentication, the user’s browser proves itself to the server using a cryptographic exchange during the authentication process.
Integrated Windows authentication supports both the Kerberos v5 and  the NTLM   (NT LAN Manager) protocols for authentication through the  Negotiate package.
Digest Authentication:
Like Basic Authentication, Digest Access Authentication is based on a simple challenge-response method. The Digest scheme challenges using a nonce value (a server-specified data string which may be uniquely generated each time a 401 error is made.). A valid response contains a checksum of the user name, the password, the given nonce value, the HTTP method, and the requested URL. In this way, the password is never sent as easily decoded text, which is Basic Authentication’s biggest weakness.
Like Basic Authentication, Digest Access Authentication is based on a simple challenge-response method. The Digest scheme challenges using a nonce value (a server-specified data string which may be uniquely generated each time a 401 error is made.). A valid response contains a checksum of the user name, the password, the given nonce value, the HTTP method, and the requested URL. In this way, the password is never sent as easily decoded text, which is Basic Authentication’s biggest weakness.
.NET Passport Authentication:
IIS 6 can use Microsoft’s .NET Passport to authenticate users requesting resources from a web site or a web site virtual directory. The benefit that this solution offers is that the credentials are stored and managed on another server that you are not responsible for building or maintaining. Users can authenticate using the .NET Passport service and then be allowed access to the web site hosted on your WS03 server.
IIS 6 can use Microsoft’s .NET Passport to authenticate users requesting resources from a web site or a web site virtual directory. The benefit that this solution offers is that the credentials are stored and managed on another server that you are not responsible for building or maintaining. Users can authenticate using the .NET Passport service and then be allowed access to the web site hosted on your WS03 server.
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Courtesy:http://sharenotes.wordpress.com/2007/10/16/iis-authentication-model-and-options/