Samba supports the following options to the global smb.conf parameter
[global] security = [share|user(default)|domain|ads]
Please refer to the smb.conf man page for usage information and to the document DOMAIN_MEMBER.html for further background details on domain mode security. The Windows 2000 Kerberos domain security model (security = ads) is described in the ADS-HOWTO.html.
Of the above, "security = server" means that Samba reports to clients that it is running in "user mode" but actually passes off all authentication requests to another "user mode" server. This requires an additional parameter "password server =" that points to the real authentication server. That real authentication server can be another Samba server or can be a Windows NT server, the later natively capable of encrypted password support.
A SMB server tells the client at startup what "security level" it is running. There are two options "share level" and "user level". Which of these two the client receives affects the way the client then tries to authenticate itself. It does not directly affect (to any great extent) the way the Samba server does security. I know this is strange, but it fits in with the client/server approach of SMB. In SMB everything is initiated and controlled by the client, and the server can only tell the client what is available and whether an action is allowed.
I'll describe user level security first, as its simpler. In user level security the client will send a "session setup" command directly after the protocol negotiation. This contains a username and password. The server can either accept or reject that username/password combination. Note that at this stage the server has no idea what share the client will eventually try to connect to, so it can't base the "accept/reject" on anything other than:
the machine that the client is coming from
If the server accepts the username/password then the client expects to be able to mount any share (using a "tree connection") without specifying a password. It expects that all access rights will be as the username/password specified in the "session setup".
It is also possible for a client to send multiple "session setup" requests. When the server responds it gives the client a "uid" to use as an authentication tag for that username/password. The client can maintain multiple authentication contexts in this way (WinDD is an example of an application that does this)
Ok, now for share level security. In share level security the client authenticates itself separately for each share. It will send a password along with each "tree connection" (share mount). It does not explicitly send a username with this operation. The client is expecting a password to be associated with each share, independent of the user. This means that samba has to work out what username the client probably wants to use. It is never explicitly sent the username. Some commercial SMB servers such as NT actually associate passwords directly with shares in share level security, but samba always uses the unix authentication scheme where it is a username/password that is authenticated, not a "share/password".
Many clients send a "session setup" even if the server is in share level security. They normally send a valid username but no password. Samba records this username in a list of "possible usernames". When the client then does a "tree connection" it also adds to this list the name of the share they try to connect to (useful for home directories) and any users listed in the "user =" smb.conf line. The password is then checked in turn against these "possible usernames". If a match is found then the client is authenticated as that user.
Finally "server level" security. In server level security the samba server reports to the client that it is in user level security. The client then does a "session setup" as described earlier. The samba server takes the username/password that the client sends and attempts to login to the "password server" by sending exactly the same username/password that it got from the client. If that server is in user level security and accepts the password then samba accepts the clients connection. This allows the samba server to use another SMB server as the "password server".
You should also note that at the very start of all this, where the server tells the client what security level it is in, it also tells the client if it supports encryption. If it does then it supplies the client with a random "cryptkey". The client will then send all passwords in encrypted form. You have to compile samba with encryption enabled to support this feature, and you have to maintain a separate smbpasswd file with SMB style encrypted passwords. It is cryptographically impossible to translate from unix style encryption to SMB style encryption, although there are some fairly simple management schemes by which the two could be kept in sync.