From Microsoft's press release:
Wallop solves the problems plaguing current social networking technologies .... Wallop developed a unique set of algorithms that respond to social interactions to automatically build and maintain a person's social network.I like this idea. Automatically building the network means less work for users. It means the network is less likely to become stale over time. It increases the likelihood that people will start using it and keep using it.
Microsoft Research has published a couple papers that appear to cover some of the technology behind Wallop, "Wallop: Designing Social Software for Co-located Social Networks" (PDF) and "Personal Map: Automatically Modeling the User's Online Social Network" (PDF).
From the papers, it sounds like they build a social network implicitly from communications (e-mails sent, instant messaging, etc.) between people.
I have been more interested in seeing this data used to prioritize contacts and incoming messages, like MSR's Priorities and Inner Circle projects, but exposing the social network derived from this data is also clever and useful.
See also Kari Lynn Dean's Nov 2003 Wired article on Wallop.