Problem solved. I found a post from Gil:"Sounds like they have the Use Windows NT Security box checked. Ask them to
check and make sure the only authentication is "Clear Text"
which I sent to my host. This is the reply I got (and the problem is now solved!)
"I checked the settings on the directory security. The box for "authentication is 'Clear Text'" is checked. I did take off "Integrated Windows Authentication," however."
Hope that will save somebody hours of frustration.