Well, I have now discovered the solution to my issue!!
This issue was caused by leaving Anonymous Access set to "Entire Web Site" in Site Settings -> Advanced Permissions under the Settings -> Anonymous Access, and switching OFF Anoymous Access via Central Administration -> Application Management -> Authentication Providers (Default) -> Edit Authentication. This allowed ANY user in AD to log into the site with read access and see everything! Regardless if WSS is on the Domain Controller or an a different box.
So to fix the problem I had to switch ON Anonymous Access via Central Admin so that I could actually see the Anonymous Access Menu option in Site Settings -> Site Permissions. I then went into to the Menu option and set it to "Nothing". Then back into Central Administration -> Application Management -> Authentication Providers (Default) -> Edit Authentication and swithed OFF Anonymous Access. The Site is now fully Secure and only users who have access permissions in the SP site can actually log in.
I put this down to inexperience with SharePoint (ME that is!) at the same time as taking over the site from someone else who had switched on Anonymous Access for some strange reason. I thought that switching OFF Anonymous Access in Central Admin was enough, however I didn't know it was a 2 step process that can only be reversed by performing 2 steps in the opposite way.
Problem Solved!