In a nutshell, a sandbox is security mechanism used to run an application in a restricted environment. If an attacker is able to exploit the browser in a way that lets him run arbitrary code on the machine, the sandbox would help prevent this code from causing damage to the system. The sandbox would also help prevent this exploit from modifying and even reading your files or any information on the system.
We are very excited to be able to launch Google Chrome with the sandbox enabled on all the platforms we currently support. Even though the sandbox in Google Chrome uses some of the new security features on Windows Vista, it is fully compatible with Windows XP.