Try adding the IUSR_Computername account as a SharePoint user with Read
rights to those folders. When doing anounymous access  users are
authenticated, they are just all authenticated as the IUSR_Computername
user. (Or whatever user has been setup to be the anonymous  access user in
IIS in your Farm).

This is a single web front end farm. I gave the local IIS anonymous
account full access  permissions to the sub folder
called "SubFolder".

I then, attempted to view a single image that happened to be in
SubFolder like this:
ourServerName/.../testPic.jpg

I'm getting an authentication  prompt. Any other suggestions?

It is beginning to appear to me that this isn't going to be
resolvable because it may be by design, but it is a huge issue. It
may even be big enough that our organization may re-think our
decision to use this technology as a CMS.

I'm curious how others are handling this issue in a Content
Management scenario?

If users setup an doc  library to store the appropriate images for
their site, it is common practice to organize those images into sub
folders. Otherwise, it would be an awfully big mess. It is also
probable that the users of a particular site  (or sub site) would want
to set  custom permissions  on those sub folders  so only the
appropriate people could edit the images contained in them, but,
anonymous site visitors  could see the images when called from the
HTML in the content page.

I find it tough to believe that we'd be the only organization
wrestling with this issue, especially since the MCMS to MOSS
migration process created these sub directories to mirror the
resources structure in our MCMS installation with unique  folder
permissions to match. Any page  that uses any image in any of those
sub folders is not anonymously accessable. This in effect, has
broken the entire site. Could MS engineers really have overlooked
such a big issue?

Can anyone shed some light on a work around or solution here? Does
anyone know if anonymous  access can be set programmatically?

Ok, for those of you who may be considering MOSS for a CMS we have
verified a very disappointing reality. This information comes
straight from a member of the MOSS Dev team at MS.

If you have a document library
AND
you have sub-folders
AND
you break  inheritance so you can set  granular permissions, you will
lose anonymous  access to those sub folders  and there is no ability
(including programmatically) to set anonymous access. This was a
design decision by the team (I have no idea why).

Hopefully this will help others, like me, who believed that there
should be some way to set anonymous access  when the above conditions
are true. This is a limitation of the system.

For us, work arounds are in progress.