Very interesting problem and I know it has to be an authentication issue -- Take three computers, one is 2003 web running sharepoint team services, one is 2003 std running terminal services and the 3rd is a 2000 pro all are fully updated.
If logged into the 2000 box, I can connect cleanly to the sharepoint site, no problem. If I'm logged in, as myself on the TS box, it requests my user/pass again upon connection to the site. According to one of the posts I found here, I am having delegation issue due to needing two hops.
-quote-
You're running into what's known as a delegation issue. In Windows
Integrated authentication, the password is not actually sent to IIS. It
works when you're logged on locally to the IIS server because in this case,
IIS is on the machine that checked your password and there's only one"hop"
involved to the network location. When you're logged onto another machine,
IIS never gets the password and thus can't pass it to the network location
(two hops). Try switching to Basic authentication which does send the
password over the network.
-quote-
However, I have tried using basic authentication and annoymous, still same result. Anyway, all help is appreciated!