I am using IIS 7 and I would like sombody to tell me how to password protect a folder.
And how would you get the username and password dialog to show when someone tries to download a file in that directory.
First off, make sure you have the authentication role features installed - basic authentication sounds like what you want. In server manager, right-click IIS, add role features, and install Basic Authentication (under security) if it's not installed already.
In the IIS manager, select a location, open the "Authentication" module, and configure as desired. Disabling Anonymous and enabling Basic is probably where you want to be - it'll be using Windows users, and access to the resources will be controlled by the NTFS permissions on those resources.