Hi guys,
I had the same problem as you yesterday. Just started installing mySQL and it would pop up with that error-message.
I am not quite sure whether this was what solved the problem, but I will tell you what I did.
Now I have installed it on win2000, I'll just assume you will find the appropriate files for your platform:
run 'mysql/bin/winmysqladmin.exe'. You will be asked to make up a password and a username. Enter both. The window closes for some reason on win2000, but you will see that you've got a new little icon on the right corner of your task-bar. Right-click it and select 'show me'.
If you go to the tab 'databases' you should see two or three sample databases. If you go to my.ini Setup, you should see the content of my.ini setup. I have changed the host to 127.0.0.1 and the port to 532, because that's the settings for my Apache-server. But I think it worked with the IP that SQL gave me as well.
Try going back to Command Prompt (Dos) and enter:
c:\mysql\bin\mysql
It should work now without the error-message. It did for me, anyways. It seems all the program needs it for winmysqladmin.exe to be started once and a password and username to be entered.
If this doesn't solve it, let me know and we can compare my settings and yours and see what else I have changed to get it running.