It could be that the install script is masking the true error. What you can do is create a test.php script and bring it up in your browser. For the contents of the script, you'll use this (replace username and password with the actual username you setup, and databasename with the databasename:
<?php
$dbh = mysql_connect("localhost","username","password");
mysql_select_db("databasename",$dbh);
?>
This is the error that was returned...
Warning: mysql_connect(): Client does not support authentication protocol requested by server; consider upgrading MySQL client in c:\inetpub\wwwroot\testconnect.php on line 3
Warning: mysql_select_db(): supplied argument is not a valid MySQL-Link resource in c:\inetpub\wwwroot\testconnect.php on line 4
