I suppose I live under a log, because this is the first time I've come across the VirtualStore folder.
Located at:
C:\Users\USER_NAME\AppData\Local\VirtualStore
When an older application attempts to write to a file/directory that it doesn't have the required permissions, Windows Vista/7 redirect that app to a location that the user has permissions to write.
Example:
I'm playing Fallout Tactics and I go to save a game as a regular user (non-admin). Were this Windows 2000 or XP, I would expect an error of some sort.
Instead, the save game with a name of "testing" is created as:
Unfortunately this isn't completely reliable as I installed Heroes of Annihilated Empires (WARNING: StarForce included) and it wouldn't work unless I granted modify permissions to the Data directory, or I ran it as admin. I also had to grant permissions to a registry key to run it as a non-admin.
This looks like something I'll have to deal with at work in the near future, and thought I'd pass it on in case some of you haven't heard of it. Arkose mentioned it a while back in one of his posts, but I didn't know what he was referring to and didn't think to ask then. I thought it was something specific to GameTap at the time.

The best part that I overlooked for a long time, is the little dynamic menu below the address bar in Explorer. Go to a C:\Program Files folder that has something you would have saved in it as a user (like a game save file)... you'll see "Compatibility Files" there. Click and it jumps you to the VirtualStore folder.
Yeah a great feature in Win7, for sure.

It's one of those cool features in vista that got totally overlooked. Vista essentially included a sandbox, which is great for security and reliability.
Unfortunately, as you pointed out, it can occasionally have problems with older software. One of the reasons the UAC was so hated at launch was that a lot of old software was coded insecurely, and so it needed admin permissions to run. These days most software is better coded, so it'll run without admin/UAC. So MS essentially succeeded in their goal of making software better and more secure.... unfortunately they messed up vista's rep in the process.
I thought Starforce wasn't vista compatible? (thank god)

Heroes Of Might And Magic 2 from here does the same thing. Unfortunately, it somehow lost access to that folder as well, so now all my savegames are gone from the game. They're still in the virtualstore folder, but they no longer show up ingame :-(

can you not just drag & drop from the VS to the install directory?

Off the disk it isn't, but you can download an update which is compatible (which is what I do when I install Chaos Theory, Syberia and Scrapland). Had no problems with it as of yet after the update.

No idea. Thanks to a fixed exe I don't have to worry about that. :P

yes, you do live under a rock.
this has been discussed ever since Vista came out.

Oh well. I had no need to research that since I am still using XP for most things. I have used Vista since late 2007, but hadn't tried running any older apps on it. If I did, I treated it like I would XP and modified the permissions to allow a normal user to modify the affected directory.
Other than using it at work, I avoided Vista like the plague. It would appear that choice was slightly to my detriment. Now I can play catchup.