An Apple programmer, apparently by accident, left a debug flag in the most recent version of the Mac OS X operating system. In specific configurations, applying OS X Lion update 10.7.3 turns on a system-wide debug log file that contains the login passwords of every user who has logged in since the update was applied. The passwords are stored in clear text.
Anyone who used FileVault encryption on their Mac prior to Lion, upgraded to Lion, but kept the folders encrypted using the legacy version of FileVault is vulnerable. FileVault 2 (whole disk encryption) is unaffected.
The flaw was first reported by a security researcher David Emery, who posted his findings to the Cryptome mailing list. The bug has not been corrected by any subsequent updates. Emery explains the severity of the issue:
This is worse than it seems, since the log in question can also be read by booting the machine into firewire disk mode and reading it by opening the drive as a disk or by booting the new-with-LION recovery partition and using the available superuser shell to mount the main file system partition and read the file. This would allow someone to break into encrypted partitions on machines they did not have any idea of any login passwords for.
Since the log file is accessible outside of the encrypted area, anyone with administrator or root access can grab the user credentials for an encrypted home directory tree. They can also access the files by connecting the drive via FireWire. Having done that, they can then not only read the encrypted files that are meant to be hidden from prying eyes, but they can also access anything else meant to be protected by that user name and password. (Read More)