Can someone please enlighten me of the dangers of keeping passdwords in word.doc files on the harddisk, and is it safer to keep them on usb flashdrives, even if they are regularly connected to the computer?
It's not that I can't remember a complicated password; however IF one were to forget it at some critical point of time...under duress
Well lets see, it seems that UNIX went through this same debate 30+ years ago - the conclusion was (pay attention now): "IF IT IS ON YOUR HARD DRIVE IT CAN BE STOLEN!"
Of course you can keep a password list on your desktop (or posted in the cafeteria see
http://thedailywtf.com/ ), but that really is the same as wearing a "kick me" sign on your butt and whining when you get kicked!
That is why ALL passwords on EVERY system today (even Win 7

) are encrypted!
USB drives are ONLY safer if you keep them in your pocket until they are needed.
HINT: carefully read Symantec's superb STUXNET analysis - then ask the Iranian government about "secure" USB drives. NO I will not give you citations - do your own homework!