In order to enable Office 365 Federation with Federate 365, a small configuration change needs to be made to a group policy to allow the password handshake to happen with the Federate 365 without the NTLM box appearing.  The following outlines the method of achieving this using AD Group Policy to add the * URL into the local intranet zone on each workstation.

  1. Load up Group Policy Management and create a new policy.
  2. Within the policy browse to User Configuration > Policies > Windows Settings > Internet
    Explorer Maintenance > Security > Security Zones and Content Ratings

3. Double click on “Security Zones and Content Ratings and ensure the Import the current security zones and privacy settings is enabled, and then click ‘Modify Settings’

** Click continue if you get a message about importing settings **

4. Click on Local intranet, then Sites

5. Click the Advanced button and add the website * and click Add.

6. Now link the GPO to the appropriate OUs.