The problem occurs as a result of a hard 2 GB limit of virtual address space for 32-bit applications running in Vista. Some recent games which attempt to fully employ the large memory sizes of new video cards can use large portions of their allocated virtual address space for copies of video resources which reside in memory. In 32-bit environments, these applications can use all available virtual address space, leading to the error.
While the problem does not arise when 64-bit versions of games are run under 64-bit Windows, these combinations are still relatively rare. The hotfix issued by Microsoft changes how the Windows Display Driver Model (WDDM) handles video memory management, and according to testing by technical site Anandtech, reduces the memory footprint of 32-bit applications. Tests with Company of Heroes, S.T.A.L.K.E.R. and Supreme Commander show notable reductions in virtual address space usage with the hotfix installed, although memory usage was still higher than that of Windows XP. Benchmarks also indicated identical performance numbers in all three games with and without the hotfix installed.
More information about the bug, as well as links to download the fix for both 32-bit and 64-bit version of Windows Vista, are available from Microsoft.