A detailed analysis of quantum key distribution employing entangled states
is presented. We tested a system based on photon pairs entangled in energy-
time optimized for long-distance transmission. It is based on a Franson-typ
e setup for monitoring quantum correlations, and uses a protocol analogous
to the Bennett-Brassard 1984 protocol. Passive-state preparation is impleme
nted by polarization multiplexing in the interferometers. We distributed a
sifted key of 0.4 Mbit at a raw rate of 134 Hz and with an error rate of 8.
6% over a distance of 8.5 km. We thoroughly discuss the noise sources and p
ractical difficulties associated with entangled-state systems. Finally, the
level of security offered by this system is assessed and compared with tha
t of faint-laser-pulse systems.