This error is caused by corrupted password files in Windows

If you are using OSR2, or OSR1 with the Password List Update (Mspwlupd.exe from Microsoft):

• Delete all files with the .pwl extension in your Windows Directory.
• Restart the computer.

If you are still using the initial version of Windows95 (Build A) and have not installed the Password List Update:

• Download and install the Password List Update from www.microsoft.com.
• Then delete all .pwl files from the windows directory.
• Restart the computer.