[1] The application software along with just enough operating system (JeOS or "juice") is combined inside a virtual machine container in a manner that maximizes the performance of the application.
By minimizing the system software to the smallest set of packages required to support the application, the maintenance and administration burden of the virtual application is greatly reduced.
Packages of code reside on the server, but the details on how they are to be invoked in order to create the functionality that adds up to the application, gets passed to the server as and when needed.
The difference being that the incoming request must either include application logic ( exploiting the code packages on the server), or information on where to locate such logic in a repository.
Virtual appliances are a category of virtual applications which are further optimized for simplified setup and configuration by the customer and remote management by the application vendor.