Here's what I've found so far:

I created a small Web Service project using the standard "Hello World" Example method.

Under the IIS Console Mgr I left Authorization and Authentication as is.

I right-clicked specifically on the asmx file that had the "Hello World" method and set the file security to Windows Authentication ONLY.

I then created another project with a single page aspx that created System.Net.NetworkCreditial(User, Pass, Domain)

I then set the WebService.Creditials property member to the Network Creditial Object

and viola! It worked.

a snag I did run into was where the XP Machine ran on a domain. I'm getting trusted machine conflicts. I'm still working on that.