Software cracking is the modification of software to remove encoded copy prevention. Distribution of cracked software (warez) is generally an illegal (or more recently, criminal) act of copyright infringement. Software cracking is most often done by software reverse engineering.
A good example of a software crack would be a "No CD" crack, which is made by altering the program code so that the original distribution CD-ROM is no longer needed to execute the program. Another example occurs when businesses break the copy prevention of programs that they have legally purchased but that are licensed to particular hardware, so that there is no risk of downtime due to hardware failure (and, of course, no need to restrict oneself to running the software on said hardware only).
The passage of the Digital Millennium Copyright Act (DMCA) made software cracking, as well as the distribution of information which enables software cracking, illegal in the United States. Some groups devoted to developing tools for software cracks and the distribution of cracked software include the Phrozen Crew, UCF, CORE, TNO , and DrinkOrDie.
Software cracking might become much harder to perform with the release of the Fritz-chip in combination with certain software, like nexus in the next major operating system from Microsoft, code-named Longhorn. It will be virtually impossible to crack the actual encryption. One way to bypass the copy prevention (not the encryption) might be to emulate a computer with a compromised Fritz-chip. One could then crack the software while it is in the emulator, and then extract it to a real computer.
History of cracking
Cracking has been around as long as there has been software to crack, but software cracking started to evolve into a whole underground scene in the early 1980s, on the Apple II, Atari 800, and Commodore 64 computers. People responsible for cracking started to group themselves up into teams, known as "cracking crews" (commonly referred to simply as "groups").
Cracking crews would be made up of suppliers (the people who would get hold of new software, often before its commercial release, if a beta tester were to be located as a supplier); crackers (programmers who would defeat the copy prevention); traders or couriers (people who would then distribute the cracks around the world as fast as possible, either by mail or by uploading the software to as many BBSs as possible); and sysops (in this sense to be understood as people who would knowingly run BBSs to help distribute the software).
Coders started adding "crack intros" to the cracked software to show which cracking crew was responsible. Crews would compete with each other to get new software distributed faster than their rivals, and to be the ones that provided the most reliable cracks. As these crack intros became more complex, with better graphics and animation, people began to appreciate them in their own right, and groups produced intros without having an associated crack. This was the beginning of the demoscene.