This is one hell of a bug, that was created by a feature change in 3.51 .NET Framework SP1, Changes to NTLM authentication for HTTPWebRequest in Version 3.5 SP1. The full resolution can be found in KB896861. To make things worse, there isn't a UI to fix the problem. You are required to make registry entries for each of the aliases that you wish to use. If you are tyring to access a local web service using NTLM, you may run into this issue.
While setting up SSRS 2008 R2 for a new TFS 2010 Server, I wasted about 6 hours trying to figure out why the old TFS 2008 server was working, and the new TFS 2010 Server wasn't. the old server wasn't correctly setup and left us unable to create any new projects, so we decided to create a new server to replace it, and ended up with this problem. Fortunately we were able to resolve this issue, unlike the issues on the old server, but this was just a complete waste of time. Microsoft could have easily patched SSRS to automatically make these changes for you when you add additional URLs.
Anywho, as with most of these posts, it's here to ensure that I don't waste all this time again the next time I run into this issue. It applies to IIS, SSRS, and anything else that uses HTTPWebRequest.