Where and how are my passwords stored? Are they encrypted?

All passwords are stored encrypted. By default, the encryption is not strong however, and a determined user could potentially decipher the encrypted password. Remember that if a person can read your files or registry, then they have access to your entire machine anyway.

You can optionally use much stronger (AES 256-bit) encryption. To do this, select Preferences->Options from the main menu, then go to the Encryption page. See the help file for details and warnings.