DETAILS
By default, your root directory is setup as an application root or application starting point. However, you can have more than one application per Web site.
Every file and directory that is beneath the "starting point" directory in your Web site is considered part of the application until another "starting point" directory is found.
With each application, IIS will have its own application object accessible through ASP or ASP.net. You can configure application start and end behavior within either global.asa or global.asax. (Note that global.asa and global.asax can only exist in an application root).
To create a web application, you can use the Web Application Tool in the control panel.
Visual Studio .NET Users:
If you use Visual Studio .NET, each project under the root (eg. http://www.YourHostedDomainName.com/webapplication1) is set up as an application. VS.net will automatically create the application root when you create or copy a project.
