I’ve had to track this down a couple times now so I’m going to write it down for myself and if it helps others then so much the better.

The problem

When you run the ASP.NET development server out of Visual Studio, you’ll be prompted by Firefox or IE for a username and password before you can continue.

The following solutions worked for me using Windows 7, Visual Studio 2008 & 2010 with Firefox 3 and Internet Explorer 8.

Firefox solution

Type about:config into the address bar to open the Firefox configuration area.

Locate the following lines under the preference name column, double click the row and enter localhost into the value.

network.automatic-ntlm-auth.trusted-uris
network.negotiate-auth.delegation-uris
network.negotiate-auth.trusted-uris

Internet explorer solution

Menu: Tools -> Internet Options

Tab: Security

Click on the Trusted Sites icon and then the Sites button below.  In the textbox type localhost. Click the add button and the URL should appear below. Click Close.

Now click on the Local Intranet icon and the Sites button below.  Uncheck automatically detect intranet network. Check Include all local (intranet) sites not listed in other zones. Click OK. Click OK.