You nailed the problem. The only thing now I cannot figure out is, I
have a custom logo on the sharepoint portal site. That I created and
copied it in the same folder where the default logo is i.e.
/_layouts/images/sitelogo.gif

The logo comes up fine when I log in on the Portal Site. However when
the user  logs on to the site, the site  displays however before bringing
up the logo it prompts the user to put in ID & PWD. The user puts in the
ID & PWD,which I think fails since the logo does not get displayed.

What am I missing here (permissions ??? what & where ???)