You need to go into FTP, and delete the .htaccess files. A simple way to do this, is log in via CuteFTP, goto the admin folder....and type a custom command saying;
DELE .htaccess
and then
DELE .htpasswd
Then, upload the attached script to your admin folder, CHMOD to 755, and run. You will be asked for a password, which is 'password'. Then just setup your new .htaccess password protection via that script...
In your admin directory there should be two files, named htaccess and htpasswd. Make backups of those (just in case...), then remoce them from the admin directory. Now go to your admin, it should have the "unprotected" warning again, and you can create a new username/password.
Did you read the instructions? You need to upload and/or create ".htaccess" and ".htpassword" which are empty files. CHMOD to 666. The script does not create these files, it just writes to them.
Edit; I just read the readme posted above, and find that it is for version 3, while I use version 2. The current (v3) readme does not tell you to upload/create the files, but from looking at the cgi code, it looks like you still need to do so.
So, I understand why you were unclear on that point...