Internet Explorer version 8 has got some annoying loopbackcheck. Whenever you want to browse a local hosted site (IIS), it will pop up a security dialog in which you have to fill in your username and password.
Whatever combination you fill in, eventually you will get a 401.1. error.

You can resolve it by editing the the registry.

1. Click Start, click Run, type regedit, and then click OK.
2. In Registry Editor, locate and then click the following registry key:

   HKEY_LOCAL_MACHINE\SYSTEM\CurrentControlSet\Control\Lsa

3. Right-click Lsa, point to New, and then click DWORD Value.
4. Type DisableLoopbackCheck, and then press ENTER.
5. Right-click DisableLoopbackCheck, and then click Modify.
6. In the Value data box, type 1, and then click OK.
7. Quit Registry Editor, and then restart your computer.