Application pools allow you to configure one or more web applications to a worker process. An application pool is separated from other application pools by worker process boundaries. So what does this mean? ...An application in one application pool is not affected by problems caused by applications in other application pools. This along with sensible recycling of your application pools, results in your web server being more efficient and reliable.
By default IIS 6 dumps everything into one application pool. So as you add new web applications to your server you should consider logically grouping them into pools. Due to there being an overhead for each application pool it makes more sense to group the web applications into related pools rather than just create a pool for each web application.
Recycling Your Application Pools
To keep your sites working efficiently your should configure IIS to periodically recycle your application pools and recycle them when they become unstable (using too much memory/cpu etc). Recycling cleans up memory fragmentation, memory leaks, abandoned threads and other bits of unwanted clutter. Note that when an application pool recycles, ASP.Net session state information stored in-process is lost for that pool, however other pools are not affected. If this is a problem then you'll need to use another session state mechanism for your ASP.Net web applications.
Application Pool Recycling Events
It's important that you review why your application pools are being recycling. For example, if you have a pool recycling every 30 mins due to excessive memory use then you have an issue with that applcation's code and it needs looking at. Event logs for application pools are off by default, to enable them see this Microsoft KB article.
When you configuring your application pools you can configure the identity of each worker process to run as a different user and should consider how to configure application pools for application security. For example, you might need to create separate application pools for applications that require a high level of security, while allowing applications that require a lower level of security to share the same application pool.
Hopefully with this post you can see the benefits of spending some time in setting up your application pools in IIS and you've made a step in the right direction for improving your web server's reliablility and efficiency :)