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I've been trying to figure out the method of encryption for OSR2 Win95 and Win98 *.pwl files and I was hoping someone had some details about the method used. [...] Does anyone have it figured out?

I think Peter Gutmann and someone else figured it out sometime ago.

Peter Gutmann figured out the old system. In reaction the system was changed by the OSR2 patch and in all further releases of Windows. What exactly it was changed to is the question. Chris.