I have to say the name is very cheesy. And I'd prefer not only to "isolate" it on the hard drive, but rather run it as a complete virtual machine, if I was that paranoid.

FreeBSD jails <3

Operating system level virtualisation is not a complete emulation of a platform, but rather a clone of the host system, in a manageable and effective way. That allows you to run certain applications (take for instance a web server) in their own ‘jail,’ and if someone compromises it, or it goes bonkers and starts eating system resources, it can never interfere with things outside of it's jail. You just shut down the jail, or the virtual computer, or whatever you'd like to call it. That is an improvement over only jailing the hard drive resources, and that is also what I'm talking about.

Of course, for the casual Windows user, this might be better than nothing in certain cases.

And here I thought that Sandboxie provided just that kind of jail? It certainly does more than hard drive resources: It manages registry entries as well inside the sandbox, for instance. I think I've heard that people use it to test out computer viruses, which means it must at least manage everything that could leave a permanent mark!