Configuring Basic Auth for a SOAP receive location

This is a simple thing, but I've been searching for hours and can't find a complete example. 

I published an orchestration (BT2010, IIS7) as a simple web service (not WCF).  I have disabled anonymous access and enabled Basic Authentication.  If I try to browse to it, I get a dialog box asking for credentials. 

I set up a local account on the machine, and added it to the IIS_WPG group, and made sure the app pool is running under an account that is part of the Biztalk isolated hosts group. 

One question and one problem: When a SOAP request comes in, IIS will retrieve the credentials from within that instead of trying to present a dialog bos, correct?

Now my problem. Supplying the credentials doesn't seem to work.  I've tried setting the default domain to the machine name and domain path  server.somedomain.parentdomain, I've tried using my domain own domain account as login credentials, none of it works. 

So first, do I have to use a Windows account? Can I set up some dummy account just for this web site? 

And second, if its a Windows account, what am I doing wrong here?  I have found a ton of examples for consuming web services,  but of the ones for exposing web services none walk you through setting up a Basic Auth solution. 

Thanks