IIS7 - Basic Authentication Module missing?

You might have to install the basic authentication module for IIS.

For vista it is: Control Panel -> Programs -> Turn Windows features on or off

For Server 2008: Server Manager -> Roles -> Web Server -> Add Role Services

Then in the treeview it is: Internet Information Services -> World Wide Web Services -> Security - > Basic Authentication

Click the checkbox and install. Then you should be able to see the basic authentication option.