The Security Accounts Manager (SAM) file in Windows XP, Windows Vista and Windows 7 stores users' passwords in a hashed format (in LM hash and NTLM hash). Since a hash function is one-way, this provides some measure of security for the storage of the passwords.
In an attempt to improve the security of the SAM database against offline software cracking, Microsoft introduced the SYSKEY function in Windows NT 4.0. When SYSKEY is enabled, the on-disk copy of the SAM file is partially encrypted, so that the password hash values for all local accounts stored in the SAM are encrypted with a key (usually also referred to as the "SYSKEY").
In the case of online attacks, it is not possible to simply copy the SAM file to another location. The SAM file cannot be moved or copied while Windows is running, since the Windows kernel obtains and keeps an exclusive filesystem lock on the SAM file, and will not release that lock until the operating system has shut down or a "Blue Screen of Death" exception has been thrown. However, the in-memory copy of the contents of the SAM can be dumped using various techniques (including pwdump), making the password hashes available for offline brute-force attack.
Read more about Security Accounts Manager: Removing LM Hash, Related Attacks
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