In many places the traffic travelling accross a network can be seen by all of the machines on that network. This is certainly the case in many colleges. The traffic may also pass through many other networks on it's way to the desitnation host. If somebody is watching the traffic then any usernames and passwords that are sent unencrypted can be picked up. This can be a particulary problem if one of the other computers on your network has been cracked .. that means a cracker can watch everything that you are doing!
The answer, of course, is to encrypt as much as possible. Especially usernames and passwords.