when I’m trying to deploy to an IIS7 website using Web Deploy, one of the options is to Mark as an IIS Application on destination.
What does this mean when have it ticked on or off?

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Here is the relevant text from Oded’s reference….
6.If you are not deploying IIS settings, select the Mark as IIS application on destination check box.
This option is not shown if you are deploying IIS settings, because the Web project’s IIS application status is one of the IIS settings that is deployed.
You typically select this check box when the Include all IIS settings as configured in IIS Manager check box on the Package/Publish Web tab of the project Properties page is cleared. There are very few scenarios in which you would not want to deploy a Web project as an IIS application on the destination Web server. For example, suppose that the project that you are deploying is not actually a Web application but only contains virtual directory content, such as images, XML files, and so forth. In that case, you might want to clear this check box so that the deployed project is not set up as an IIS application.