Hi Carl,
To configure a local user, you just need to type...
username xxxx password xxxx
You don't need "aaa new model" if you are not using a remote authentication host (i.e. RADIUS/TACACS) or configuring "Login Password Retry Lock-out (IOS 12.3(14)T)".
To obscure all text passwords using a Vigenere Cipher. Type...
service password-encryption
..but this can still be decrypted.
If you want a password with MD5 hashing (IOS 12.2(8)T), use the command...
username secret
Regards,
Dandy