It happens when a developer tries to deploy their first ASP.NET application to an ISP's or employer's shared web server environment. Take a close look at the graphic above, particularly the highlighted section. It's a helpful clue, though in most cases it's not exactly correct.
What's most likely is that the application folder was copied to the site on the production server, without configuring the folder as a virtual directory at all. See earlier IIS posts on automating the creation and configuration of virtual directories with VBScript. You can hand these off to your site administrator.