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Windows 95 stores password in memory unencrypted. With detailed knowledge of programming and the Microsoft Windows architecture, it would be possible to read those passwords out.
Note that the passwords are only stored in memory unencrypted. When sent over the network and stored on disk, the passwords are encrypted. Microsoft states that this is a problem in Windows 95 original retail version, and Windows 95 OSR2. The page in the KnowledgeBase has more detailed information, and link to the update.
Article in Microsoft KnowledgeBase (includes link to download update)
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