Difference between Virtual Directory and an Application in IIS

Major reason for that is because in IIS 5.0 and IIS 5.1 we did not have the concept of AppPools, which has come up in the later versions.

Essentially, now an Application is directly mapped to the AppPool through it's AppDomain. Therefore, your Asp.Net application may contain various Virtual Directories but will run within the same AppDomain.

http://www.iisworkstation.com/2008/05/difference-between-virtual-directory.html