I was approached by an attendee at the Christchurch Code Camp yesterday with question that at the time I could not answer - I should have been able to answer but my brain was frazzled.
What is the difference between a virtual directory and an application in IIS 7?
The correct answer is:
A Virtual Directory and an application allows you to create an alias for a physical folder that may actually reside in a different folder, or disk drive or even computer than the current physical path.
The difference with IIS 7 is that an Application allows you to specify a different Application Pool where as a Virtual Directory does not.