Sandboxie runs other applications by injecting the application code into Windows kernel by API hooking. by doing this it redirects all the file system calls by the application to a virtual space. This essentially works as if a virtual hard disk is used by the application. The advantage of such mechanism is that any malware downloaded by the application (a web browser in most cases) is limited to the virtual space. For this reason sandboxie is regarded as great security tool.
Another advantage of using sandboxie is that if you install a trial software on sandboxie, you will be able to use it beyond the trial period.
Sandboxie doesn't work with 64 bit versions of windows 7. You may try DeepFreeze or Microsoft's SteadyState. Returnil is a more powerful (paid) application. There is a free version of Returnil available for home use.