Microsoft gives the foloowing reason for the problem:
This Microsoft® Windows® 95 Password List Update fixes a bug which existed in the Windows 95 Service Pack 1 Password List Update. (The bug does not exist in the shipping version of Windows 95.) This bug occurs when an application, such as Dial-Up Networking, attempts to remove a cached password, or when a user saves a password to a password protected resource, such as a network drive. If an application attempts to remove a cached password, a section of the cache file (.PWL file) can become corrupted, causing any passwords cached in that section of the file to be lost, and making it impossible to cache further passwords in that section of the file.
The Update also includes enhanced protection for cached passwords. When you connect to a password-protected resource, such as a network drive, you can choose to save that password. Windows then stores the password in an encrypted file on your hard drive. However, an algorithm was posted on the Internet that enabled unauthorized users to decrypt this file and gain access to your password-protected resources. The Password List Update provides a vastly improved encryption algorithm that is significantly harder to decrypt than the previous encryption algorithm.
Similarly, if a user saves a password to a password-protected resource, a section of your password cache file (.PWL file) may become corrupted, which would cause any passwords cached in that section of the file to be lost, and make it impossible to cache further passwords in that section of the file. This update resolves this problem. Anyone who has installed or will install Windows 95 Service Pack 1 and uses an application which attempts to remove passwords from the password cache should install this Update after installing the Service Pack.
NOTE: This download is not intended for use on computers running Microsoft Windows 95 A, B, or C or Microsoft Windows 98. To determine if you are running Windows 95 A or later, click Start, point to Settings, click Control Panel, then double-click System. If the version number reported is 4.00.950 A or later, do not install this update. Your system already contains the appropriate fix.
System Requirements
Microsoft Windows 95
How to Download
Create a folder by right-clicking on the desktop, click New, and then click Folder. Type a name for the folder and press enter.
Click the Download Now button at the top or bottom of this page. In the File download dialog box that appears on your screen, click Save Program to Disk.
Choose to save the file in the folder you just created, then click Save.
Open that folder and double-click mspwlupd.exe to install the program files. Be sure to read the "Read-Me" files for additional information.
How to Use
You don't need to do anything after dowloading.
Related Information
Windows 95 Service Pack 1
The Microsoft Windows 95 Service Pack 1 includes an update, system administration tools, additional components, and drivers for Windows 95. More detailed information about each of the fixes is included in the Service Pack Fixes document.
The password update file that I refered to earlier is at
http://support.microsoft.com/support.../E9P37LEQ1.ASP