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It appears that the tomcat-users.xml file is not updated when the password for the 'manager' role is changed in the server properties. This *may* be due to the fact I was running NB from a different user account than the one that was used to install NB originally. Everything else runs fine and can create/design/run the Midnight Cookie tutorial (http://www.netbeans.org/kb/50/tutorial-webapps.html) Manually changing the user/pwd in the file fixes the issue.
The described behavior is not a bug, it is intentional. The username and the password from the server manager dialog uses the IDE for connecting to Tomcat and since the tomcat-users.xml file is not the only way that Tomcat can use for authentication (it can use JDBC connection for authentication for example) we do not even plan to change this.