There is a vulnerability in the implementation of the recycle bin in Windows NT and Windows 2000. It was noticed both by me and Nobuo Miwa.
I'll explain it with an example:
Say that you have a volume c: where the recycle bins are stored under c:\recycler. All users must have permission to create new directories there because the first time a user throws something into the recycle bin, a directory is created in c:\recycler, which is named with the user's SID. This is done in the security context of the logged on user.
Imagine that there is one user A (attacker) and another V (victim), and that A logs on before V has thrown anything into the recycle bin for the first time. A creates a directory in c:\recycler with the same name as V's SID, and then sets Full Access for A and V on this directory. When V throws files in the recycle bin they will always retain their original permissions, and thus A will not be able to read their contents this way. However, since A has Full Access to the directory he/she will be able to delete all files in it. This is the first problem, A shouldn't be able to delete files from V's recycle bin.
The second problem is that if V throws an executable file into the recycle bin, A can delete it and then copy another executable file into the recycle bin and rename it to the same name as the original file had. That file could do anything A wants it to do. V might restore it and run it... after all, you probably trust what's in your recycle bin.
Another possiblity (which I haven't tried in practice, so I could be wrong) is for A to modify the INFO file in V's recycle bin. Say that V has thrown a secret document into the recycle bin, and that A modifies the INFO file so it doesn't point to the original location (which we suppose is located on a NTFS partition) but to a FAT partition. Then if V restores the file, it will loose its permissions, and V probably will never understand why it wasn't restored but (to him/her) seems to be gone.
Microsoft has released a patch and you can read more about it in their Security Bulletin