You trade disc space for time. You convert lots of possible passwords to how Windows stores them and then compare what you find on the machine with your (very large) database. Windows XP is particularly bad because unless you tell it otherwise, it converts your long password into two short ones, to make it easy to crack.. erm, to make it compatible with some broken Microsoft network system.
Ophcrack is one implementation. If it gets your Windows password, get a new password (or operating system!)