The Ethereum Virtual Machine or EVM is the runtime environment for smart contracts in Ethereum. It is not only sandboxed but actually completely isolated, which means that code running inside the EVM has no access to network, filesystem or other processes. Smart contracts even have limited access to other smart conrtacts.
There are two kinds of accounts in Ethereum which share the same address space: External accounts that are controlled by public-private key pairs (i.e. humans) and contract accounts which are controlled by the code stored together with the account.
The address of an external account is determined from the public key while the address of a contract is determined at the time the contract is created (it is derived from the creator address and the number of transactions sent from that address, the so-called "nonce").
Regardless of whether or not the account stores code, the two types are treated equally by the EVM.
Every account has a persistent key-value store mapping 256-bit words to 256-bit words called storage.
Furthermore, every account has a balance in Ether (in "Wei" to be exact, 1 ether is 10 ** 18 wei) which can be modified by sending transactions that include Ether.
The Ethereum Virtual Machine has three areas where it can store data—storage, memory and the stack.
Each account has a data area called storage, which is persistent between function calls and transactions. Storage is a key-value store that maps 256-bit words to 256-bit words. It is not possible to enumerate storage from within a contract, it is comparatively costly to read, and even more to initialize and modify storage. Because of this cost, you should minimize what you store in persistent storage to what the contract needs to run. Store data like derived calculations, caching, and aggregates outside of the contract. A contract can neither read nor write to any storage apart from its own.
The second data area is called memory, of which a contract obtains a freshly cleared instance for each message call. Memory is linear and can be addressed at byte level, but reads are limited to a width of 256 bits, while writes can be either 8 bits or 256 bits wide. Memory is expanded by a word (256-bit), when accessing (either reading or writing) a previously untouched memory word. At the time of expansion, the cost in gas must be paid. Memory is more costly the larger it grows.