In the end, an operating system is just a series of ones and zeroes that, when interpreted by the processor, cause the computer to do certain things. Change the ones and zeroes, and it will do something different. Where are the ones and zeroes stored? Why, on the computer, right along with everything else! They're just files, and if other people who use the computer are permitted to change those files, it's "game over."
To understand why, consider that operating system files are among the most trusted ones on the computer, and they generally run with system-level privileges. That is, they can do absolutely anything. Among other things, they're trusted to manage user accounts, handle password changes, and enforce the rules governing who can do what on the computer. If a bad guy can change them, the now-untrustworthy files will do his bidding, and there's no limit to what he can do. He can steal passwords, make himself an administrator on the computer, or add entirely new functions to the operating system. To prevent this type of attack, make sure that the system files (and the Registry, for that matter) are well protected. (The security checklists on the Microsoft Security Web site will help you do this.)