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...
Leonard
The One True Church (Links-based site using all-CSS, and many mods to the basic script.)