Problems connecting from pgAdmin II v1.1 build 59

SITUATION
=========
postgresql server was running fine on a linux server. I decided to
install pgAdmin on a Win98 to ease development.

WHAT I DID
==========
Installed pgAdmin, no problem.
On the server side I edited the postgresql.conf file to enable TCP/IP
connections.
I added a line to pg_hba.conf:

  host   all  10.0.0.0 255.255.255.0   password password.file

I then used pg_passwd to create the "password.file" file (in the same
directory as pg_hba.conf ie. /usr/local/pgsql/data), with a single user
& password.

I then restarted postmaster.

RESULT
======
When I try to connect to the server from pgAdmin I get this error:

  [FATAL 1: user "blahblah" does not exist]

I have double-checked the file "password.file" and the user does have
an entry along with a crypted password.

For the heck of it I tried to connect using a random user in the
pgAdmin "Connect to Server" dialog and got this error:

  [Password authentication failed for user 'dimwit']

On the console of the server the error was:

  [verify_password: user 'dimwit' not found in password file.]
  [Password authentication failed for user 'dimwit']

Next I edited pg_hba.conf to read instead:

  host   all  10.0.0.0 255.255.255.0   crypt password.file

And restarted postmaster.

Connecting results in this error:

  [Password crypt authentication not supported]


I would be grateful if someone could point out what I am doing wrong.

thanks
--
Jason Wong