Siva - the product by default does not have the password history feature you're looking for. If you're comfortable overriding the membership provider you could possibly do this but you'd still need to modify the schema to store the last three passwords in some table. DNN uses the membership provider model from Microsoft so it's pretty straightforward (to some extent :)) to swap out the provider and replace it with your custom one which would have the logic of determining the last three passwords, etc.
Sanjay

Another way would be to modify the existing provider (that comes with DNN) but the problem with this (down the road) is that if you upgrade to a newer version of DNN, you'd have to replicate those changes again.
 

Siva - the keys are stored in web.config (machine keys). If you look at the Membership class (via Reflector), you should see a couple of calls in the system.web.security.membershipprovider namespace which should give you a clue as to which one to use. If memory serves me right there was a decryptpassword or unencodepassword which I had to override in my oracle version...

Check it out and let me know if you still need help.
Sanjay