The basics of this feature is explained in the article Folder Virtualization Concepts in Windows Vista.
Impact in MSI Packaging
Files in a registry key can be found twice in your installation. Especially if the application has to be launched to customize options and settings.
Virtualized resources needs to be merged with the original files and the virtualized resources can be deleted from the installation resources. If file and registry virtualization is enabled on the default user environment, you will need to test the application with two different default user accounts. Check if resources from the application gets virtualized and that those contents will not affect the proper functionality of the application.
The best practice is to disable the file and registry virtualization. Microsoft does not guarantee this feature will be in future releases of Windows. If a file or registry key needs permission changes, use the LockPermission table or use a custom action to modify the related security descriptor of those resources. If the user has the permission to modify the resources, it won’t be virtualized.
It’s recommended to use the latest release of a product that supports Vista. Applications following the Microsoft development guidelines for Vista compliant applications, are modifying resources in the user profile where virtualization will not take place.