Well I wouldn't say it undoes all of it, but it does circumvent the USERNAME:PASSWORD issue.

Basically this is being done to curtail spoofing of website addresses. In older versions of IE you would see the ENTIRE URL address but in newer version of IE you don't.

Example:
Old Browser:
http://www.wingtiptoys.com@example.com

IE6 SP1 and Server 2003 only show
http://example.com

You can read more about it here
http://support.microsoft.com/default.aspx?scid=kb;en-us;834489