For the benefit of others, the problem was one simple IIS option.
Under "Manager Your Server/ Manage this Application Server/ IIS/ Local Server/ Web Sites/ Default Web Sites", right-click on "Default Web Sites", under properties and select the "Directory Security" Tab.
Select Edit the "Authentication and Access Crontrol". For me, i needed to deselect/uncheck the "Integrated Windows Authentication" box.
Hope this helps someone else.
Have the same issue with IIS7, how can I change that value ?