Microsoft Knowledge Base Article 308135 contains the following summary:
This article describes step-by-step how to create a virtual directory on an existing Web site in a Windows 2000 environment.
A virtual directory is a directory that is not contained within the Web site's home directory, but appears to client browsers as though it were. A virtual directory has an alias that is mapped to the physical location of the Web content. A client appends the alias to the URL of the Web site in order to browse the Web content in that virtual directory. The following table illustrates these mappings:
Both virtual directories and physical directories (directories without an alias) are listed in Internet Services Manager. A virtual directory is indicated by a folder icon with a globe in the corner.