I don't see how the grant all privileges etc thing will cause a 1017 error on your server.
Technically, to run your server, you don't have to open up a MySQL prompt and type that in - you just run world.exe and boot5zones.bat.
What will cause a 1017 error is either you not having your ports opened up, you having wrong IP Addresses in wrong places in certain files (Loginserver.ini and Boot5zones.bat mainly), or you not having the right files for the particular server you are trying to run.
The username/password it is referring to is the original one you put in for mysql when that box popped up.
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