First off: Don't invent your own authentication protocol. Period. If you do, you WILL get it wrong even if you're using strong encryption. There are a number of existing well documented authentication protocols that have been vetted by cryptographers and thus are thought to be secure. Don't be tempted to "simplify" them, they've already been simplified.
Second: IMHO you should never send passwords on the wire for authentication (I'm not aware of any authentication protocol which does, including the hideously insecure NTLMv1 protocol)[1].
If you're dead set on going down the "roll my own authentication scheme" path, here's how I'd make the scheme you described above more secure (Caveat: I'm not a cryptographer - I believe that there are serious weaknesses in what I'm describing here):
Instead of sending the password directly, send a one-way-function (also known as a OWF, often implemented as a cryptographic hash like SHA256 or stronger) of the password.
In other words, have the server send the client a salt value, add the salt to the password, compute the OWF of the password+salt value and send the OWF result to the server. On the server, add the salt to the password and also perform the OWF calculation. If the results are the same, the password is valid, if they're not it's invalid.
And finally have whatever you do reviewed by a real cryptographer. They will find problems in your implementation and you're going to have to fix them. They're likely to suggest that you abandon your effort in favor of an existing published protocol.
[1] AFAIK, the only time you should send the password on the wire is when you're changing the password and even then, you should pad the length to a multiple of the block size (include the length in the cybertext so that when you decrypt it you can distinguish between the password and the padding).