I installed CRM 4.0 on a Virtual PC along with Active Directory and all the other requirements like SQL, etc…
When I tried to install the outlook CRM client on my computer and have it access the URL for the Virtual PC CRM installation it failed with 401 Unauthorized.
STEPS TO RESOLVE:
1. Added Integrated Security and Basic Authentication to the CRM IIS directory
2. Added the Virtual PC machine name to my local computer’s Intranet Zone. Make sure it’s intranet (trusted sites) didn’t work. You can do this in vista by selecting Advanced button under Intranet Sites in IE security.
3. Go to the URL in Internet Explorer and save your username and password.
4. Run the configuration wizard.




