The local.xml that can found in the app/etc/ folder of your Magento installation. It contains the database connection details to your store and the encryption key used to secure data. If a nefarious individual laid his hands on this, he/she would have everything they could want.
With the results from the upcoming eCommerce survey (soon to be released), I did some investigating and found that 156 out of 8082 Magento sites had publicly accessible app/etc/local.xml....