The three prompts are built in ti Integrated Authentication - http://www.microsoft.com/technet/prodtechnol/WindowsServer2003/Library/IIS/523ae943-5e6a-4200-9103-9808baa00157.mspx?mfr=true
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Client Authentication Process
Unlike Basic authentication, Integrated Windows authentication does not initially prompt for a user name and password. The current Windows user information on the client is used for Integrated Windows authentication. If the authentication exchange initially fails to authorize the user, Internet Explorer prompts the user for a Windows account user name and password, which it processes using Integrated Windows authentication. Internet Explorer prompts the user for the correct user name and password up to three times. If, however, the user has logged on to the local computer as a domain user, then no authentication is required when the user accesses a network computer in that domain.
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The custopm application was purchased and works quite well. It has a webpart for SharePoint where remote users who never log in to the domain can see when their password expires.
However, we only enabled it for all 401 errors as that is the expected behavior for Integrated Authentication. A 500 error is being thrown from our simple 'Hello World' page. The application is not set up on the site and that is the only page on the site. If we try to authenticate to the page using the y@domain.com we receive a 500 error. So we know it isn't the website. The only page is default.htm. The only authentication that is enabled is Integrated. Very simple and sweet, but can end in a sour note... :)