Password Glitch in Windows XP Home 	by Carpediem2100	Jan2006
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My computer was purchased in June2005.  The operating system included
in it is Windows XP Home edition, with service pack 2 already built in.

Normally one would navigate to Control Panel --> Profiles --> User Acct 
--> and click on "prevent a forgotten password" to create a "password
recovery (floppy) disk."

My computer didn't come with a floppy disk drive and I didn't purchase
one.  So when the password recovery disk wizard prompted to insert a 
floppy disk, I instead inserted a USB flash drive.
The computer finished the process.  On examination, no files in my USB
drive were altered and no files were written to it.
Windows, had written a file onto the C: drive, I think was called 
userkey.psw.  
The problem is that after inserting my USB drive, I could get access to
the password change function (password recovery). I erased all the files
on my USB drive and tried again.  I was still allowed access.
I moved the user.pwd file onto my USB drive and tried again.  This time,
Windows disallowed access.

Don't get me wrong, I think this is an excellent feature if you are able
to create a recovery floppy disk.  But my scenario seems to be a glitch
and could represent a security flaw.
I can't offer any remedies but my only suggestions are to keep your 
password in a safe place (cookie jar), and to do regular backups of 
your data/files.