Why? It doesn't say anything. If one has physical access to a machine, its administrator is usually in big trouble anyway, regardless of the operating system.
School, office or whatever; a system CD, 15 minutes...
I can see plenty of security issues!!
Of course there are security issues, but usually for the computer use there is a certain amount of trust involved. If that trust is missing, system will have to be more secure, but user experience will be severely impaired as a result. Fortunately, these are rare instances, otherwise your life with computer would be much less pleasant. You wouldn't be able to boot off CD (or hard disk any other than internal), or access your drive in FireWire mode, Open Firmware password would not be optional (and if you forgot it, you'd have to send the computer to manufacturer), password-enabled screensaver would not be optional, plugging things into USB or putting in CDs would require root password, computer would not launch if Kensington lock would not be detected, etc. etc.
This type of security is necessary in some instances, for example in Internet cafes, or schools. Mission-critical machines in companies are usually locked down in heavily isolated datacenters guarded by trigger-happy security blokes. However, in real life the above borders on paranoia, and common sense assumes that if you have physical access to the machine, you should be in control of the machine. Someone has to be, after all.
Therefore, an ability to change the password with CD is perfectly normal and not in anyway a compromise to security. If you perceive it as such, there are means to overcome this (for example FileVault to protect your data, or physical removal of CD drive -- cf. school-oriented iMac G5). But then you're in minority. After all, we're talking consumer computers there. I don't want to have a wasted week if my mom forgets the password on her Key Lime iMac. :)
Plus, if someone you don't trust has a physical access to machine, there are worse dangers than them having a proper CD. A good magnet or even a proper kick can wreak havoc. :)
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