É basicamente um sistema de arquivos e registro 'wrapper' que redireciona as tentativas de gravação de arquivos se o usuário não tiver as permissões de gravação corretas, veja o artigo da Wikipedia sobre o UAC para mais informações :
Applications written with the assumption that the user will be running with administrator privileges experienced problems in earlier versions of Windows when run from limited user accounts, often because they attempted to write to machine-wide or system directories (such as Program Files) or registry keys (notably HKLM). UAC attempts to alleviate this using File and Registry Virtualization, which redirects writes (and subsequent reads) to a per-user location within the user's profile.
For example, if an application attempts to write to a directory such as "C:\Program Files\appname\settings.ini" to which the user does not have write permission, the write will be redirected to "C:\Users\username\AppData\Local\VirtualStore\Program Files\appname\settings.ini". The redirection feature is only provided for non-elevated 32-bit applications, and only if they do not include a manifest that requests specific privileges.