This article was updated in May of 2008. We checked and updated all links.
1) Your network resources are exposed to unknown users
Once someone wirelessly connects to your LAN, they have the same access as users directly connected into your LAN’s Ethernet switch. Unless you have taken precautions to limit access to network resources and shares, intruders can do anything trusted, known users can do.
2) All of your network traffic can be captured and examined
3) Your Internet connection can be used for illegal, immoral or objectionable activities
If your open WLAN is used to transfer bootleg movies or music, you could possibly be the recipient of a lawsuit notice from the RIAA. In a more extreme case, if your Internet connection were used to upload child pornography to an FTP site, or used to host the server itself, you could face more serious trouble. Your Internet connection could also be used by spammers, DoS extortionists and purveyors of malware, viruses and their like.
It may be a noble sentiment to give free Internet access to anyone within range of your wireless LAN. But unless you put some serious protection between your "open" LAN and the one you use, you are exposing your data, and perhaps more, to serious risk.
The approach I’ll take in formulating WLAN security recommendations is based on the expected skill level of potential wireless intruders. I’ll then provide recommended security countermeasures for each skill level.
NOTE: I will generally use "AP" (Access Point) throughout this article, but this should be read as meaning "Access Point or wireless router".