Microsoft Knowledge Base Article 308150 contains the following summary:

This article describes how to create a virtual directory on an existing Web site to a folder that resides on a remote computer.

A remote virtual directory is a directory that is not contained within the Web site's home directory but appears to client browsers as though it is within the home directory. A remote virtual directory has an alias that is mapped to a Universal Naming Convention (UNC) share location. A client appends the alias to the URL of the Web site to browse the Web content in that virtual directory. The following table illustrates these mappings:

Alias URL
C:\WWWroot home directory
Customers http://Sales/Customers
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 that has a globe in the corner.