I believe he is talking about keyloggers. Malicious programs that run as a hidden task and record all key presses. Although their main use isn't for passwords, but for credit card numbers.
saints, the only thing i've come across that lets you do what you want is built into my anti-virus software, Pc-cillin Internet Security 12, although I would assume other popular brands would do something similar. I enter my private information into that and it does something to protect it. Haven't bothered using it before. Don't think it works with windows passwords, you will just need a good firewall and antispyware software installed to stop keyloggers.