When you use a visual tool like MySQL Administator (from MySQL.com), go to 'Startup Variables', Security, and place a mark at 'Use old passwords' (Use old password encryotion method (needed for 4.0 and older clients), restart the server (i had to restart windows, not just the service), and it should work.
(or place this in your my.ini)
#Use old password encryption method (needed for 4.0 and older clients)
+.
old-passwords
"We all agree on the necessity of compromise. We just can't agree on when it's necessary to compromise." - Larry Wall.