John Sheehan, Architect of Microsoft’s Application Virtualization (SoftGrid) technology, goes deep into its architecture and engineering in this video on Channel 9. This is more of a 400-level discussion. For introductory information, see the Application Virtualization site or the Microsoft Application Virtualization 4.5 Trial Guides.
Applications are normally installed directly into an operating system. Because they write to shared system files, applications can often conflict with each other, usually due to DLL or registry overwrites. Microsoft’s Application Virtualization creates application-specific copies of all shared resources, so there aren’t any changes to files or registry settings on the local machine.
In case this is your first experience with Channel 9, I highly recommend poking around on the site for awhile. Channel 9 is a conversation place for Microsoft and customers to talk in an honest and open atmosphere.