No. This is a new IIS 5 authentication scheme.
All accounts must have the Network Logon logon right.
No. The client account cannot leave the Web server computer because a Windows subauthentication DLL is used to log on the account.
Yes. All accounts using Digest authentication must have the Store Password Using Reversible Encryption option enabled.
Although Digest authentication is part of the HTTP 1.1 protocol, presently only Microsoft Internet Explorer 5 supports it.
Yes.
Digest authentication is defined in RFC 2617 (available at http://www.ietf.org/rfc/rfc2617.txt).