Confocal microscopy is an optical technique that allows imaging with high resolution. It is a variation on optical microscopy. The underlying principle behind confocal microscopy relies on spatial filtering of the light coming from the sample, so that only photons from a specific point and narrow depth of field reach the observer at any given moment. This principle is schematically illustrated below:
This picture shows a very basic microscope comprised of two lenses. On the right side is the illumination source, in the middle is the sample and on the left is the observer. To the immediate right of the observer is a pinhole. Light from points in the sample which lie on the focal plane of the microscope makes it through the pinhole to the observer, whereas light from points out of the focal plane is strongly attenuated by the pinhole and reaches the detector at a decreased intensity. The advantage of this setup is that it allows for clean imaging of only one point in the sample as the detector only collects light from a small volume around that point, confined by the depth of field, while the sample can be much thicker. In order to obtain a full two-dimensional image the sample needs to be scanned. This is usually done by translating the illumination beam with electrically orientable mirrors. Three-dimensional images of a structure can be obtained by additionally translating the focal plane (or the sample) along the optical axis. The name of this type of microscopy is a reminder of the fact that at any given moment the pinhole is in a plane of the same family of conjugate planes as the focal point of the objective.
Modern confocal microscopes can be operated in several different modes. As far as illumination options, the user can choose use either an incandescent lamp (and monitor transmission through the sample) or a laser - in which case one can additionally choose whether to monitor scattered laser light or emitted fluorescent light, if the sample has been stained with a fluorescent dye. This imaging method can further enhance the clarity of the images, since fluorescently emitted light has a different wavelength than the incident pumping light. Confocal microscopes are often equipped with color filters and dichroic mirrors (which reflect a specific bandwidth of light and transmit other wavelengths) which ensure that, when obtained in this way, the images have minimal background noise, since the illumination light is at a different wavelength and thus blocked from the detector.
A confocal microscope is a very powerful tool for the study of complex structures. It offers images of high quality and allows the user to observe different slices within the sample, which can later be superimposed to form a three-dimensional image. Besides the bulk of information which can be obtained by simply looking at a three-dimensional image, this information can be the basis of further studies of the imaged structure. For instance, one can calculate the fourier transform of the captured images, in two or three dimensions, and obtain information analogous to the information obtainable from more cumbersome techniques such as small-angle neutron scattering (SANS - which may still be necessary, depending on exactly what information one is interested in).
Because of its key feature, the pinhole before the observer, the confocal microscope has a low light collection efficiency; of all photons emanating from the point being imaged only few make it to the detector. This usually necessitates the use of lasers as illumination sources (and was a technical limitation back when the confocal microscope was first introduced around 1955, when lasers were still an academic curiosity). While lasers are fairly commonplace nowadays, the high intensity required to illuminate the sample can sometimes damage it, either chemically by causing alterations to it, or optically by bleaching any fluorescent dyes that may be used to enhance imaging.
Moreover, since it only images one point at a time, a confocal microscope is not suitable for capturing dynamic processes that happen in bulk and at timescales faster than the scanning rate. For such studies, a different imaging technique, digital holographic microscopy, is more suitable.
Finally, since this is an optical system that relies on light scattering for the identification of features in the sample, confocal microscopy has a resolution ultimately bound by the diffraction limit.
Keyword in references:
 Confocal Optical Microscopy, Robert H Webb, Rep. Prog. Phys. 59 (1996), 427–471
 How does a confocal microscope work? available at www.physics.emory.edu