Just so we're all clear, the preference is for a one-way transformation on
the passwords (hash rather than reversable block or stream cipher
encryption).
That way, the passwords can never be unencrypted - after all, you only need
to see if they match. That means the password is only in "clear text" in the
user's head and nowhere else (of course we all know the dumb user will
probably tape a sticky note with the password to his monitor...).
Also, a list of hashed passwords can be suseptable to dictionary attacks,
which is why you should also enforce strong passwords (include
caps/lowercase + non-alphanumeric characters, try to avoid common words, and
enforce a decent minimum length).
-Rob Teixeira [MVP]