I believe you have to tell IIS what user and password to use to access the folder, even if it's set for anonymous access.

Here's what MS says: note points 9, 10,11 and 12

1. Log on to the Web server computer using an account that has administrative privileges.
2. Click Start, point to Programs, point to Administrative Tools, and then click Internet Services Manager.
3. In the Internet Information Services window, expand * server name (where server name is the name of the server).
4. Right-click the Web site that you want (for example, Default Web Site), point to New, and then click Virtual Directory.
5. On the Welcome to the Virtual Directory Creation Wizard page, click Next.
6. On the Virtual Directory Alias page, type the alias that you want (for example, Sales), and then click Next.
7. On the Web Site Content Directory page, type the UNC path to the remote folder that you have created (for example, \\Server\Share), and then click Next.
8. On the User Name and Password page, type the user name and password that has sufficient privileges to gain access to the remote folder.
   
   NOTE: To maintain the highest levels of security, use an account that has the minimum permissions that are necessary to provide access to the remote content.
9. Click Next, re-type the password that you used in step eight in the Confirm Password dialog box, and then click OK.
10. On the Access Permissions page, click to select the check boxes of the permissions that you want to set for the virtual directory.
    
    By default, Read permissions and Run scripts permissions are already selected. For example, if you want to allow users to change the content in the virtual directory, click to select the Write check box.
11. Click Next, and then click Finish.

I did as you said and I followed all steps, but still failed. The virtual directory's status is Access Denied.

Please see the attached screen shot for more detail.

Try this, select properties on the Virtual directory in IIS then select "connect as". The default group of users that shows up are the local users on the IIS machine. If you are on a domain, you will need to select your domain from the drop down and then pick a user for the logon account. You didn't specify whether you are in a domain environment or not so I'm guessing. IF this doesn't get you going please specify if you indeed are in a domain environment or not. Where you selected the user from, is the shared resource a domain resource? Anything else you can think of. I've set up a test case here where my IIS server is a stand alone server within the domain, the shared folder is on a windows 2000 Pro workstation and it works fine using a domain account. It does not work using any local server account from the IIS server. Let me know how you do.

My IIS server is a stand alone server within a domain and the shared folder is on another stand alone server within a domain. Both servers do'nt join domain. So how can I connect to the resource?

Bentkey, you really made me get success. Just now, my problem has been fixed. Yes, the problem was really with access permission. I fixed it by creating the same account, the same username and apssword, on both server, the IIS server and the shared resource server. When I created the virtual directory, and was asked to enter username and password to access the network resource, I just enter the username and apassword that I just created. That's all I did.

Thanks you vermuch for your help, Bentkey.

Any idea or advise will be much appreciated.

Glad to help!