I have an ASP.NET website running on IIS 7. I would like to host a WordPress site in a folder on this site (/blog).
I know that I can run WordPress on IIS, I just don't know if anyone has tried this scenario?
Yes, you should be able to do that, and probably the easiest way to set it up is using Web Platform Installer, that will install everything with one click: http://www.microsoft.com/web/gallery/WordPress.aspx
You don't need a virtual directory for that. It's really simple really: just create a physical directory "blog" within your site's public root and extract the contents of the latest WordPress zip into that directory, then access it from your web-browser and setup should run immediately.
WordPress is PHP, not .NET, so it isn't really affected by Application Scope settings (so long as PHP runs fine within the application pool).
If, instead, you'd like a single installation of WordPress on a server and all of your websites access it by a virtual directory, then you'll run into problems. I understand (though I'm no expert) that WordPress expects visitors to be targeting a known website address.