The idea for isolated storage is that when an application stored data in a file certain security must be in place at the OS level to prevent corruption, deletion, or loss by another application or user. Isolated storage allows your application to save data to a unique place that's associated with some identity of your code, as well as the executing user.
Isolated storage gives you per user and per assembly isolation.
The location of the storage is not even really a file or folder. It is an abstraction that is mapped by the system to a location on the physical file system without your knowing the exact location. For Dot Net this location is represented by the IsolatedStorageFileStream class.
Most administrators like the fact that isolated storage is controlled by the admin to set quotas on the amount of storage allocated to isolated storage use. It is controlled as a quota from the operating system, not Dot Net. So in an Active Directory environment the domain controller can set policies for storage.
This is a pretty unique feature in VistaDB. You may create your database in isolated storage, and then use it within your application. This is particularly useful for Click Once deployment projects that are not allowed to write to the local drive. In many instances the user will give click once applications permission to use a small Isolated Storage area as a part of the Internet Security Zone. This storage is not accessible through normal file operations. Very few databases support using this area for the database file.
How to work with a database in isolated storage
How to calculate free space in isolated storage
See the MSDN article on Performing Isolated Storage Tasks for more information.