This is really simple if IIS6 but I can't seem to figure out how to convert an Application back into a Virtual Directory in IIS7 without having to delete it and recreate it from scratch.
The wording is scary but "Remove" converts it back to a regular folder. It doesn't actually delete the folder itself as you may assume. So, the command is still in the right-click on the vdir itself.
You can just right-click the application and click to remove button. This will convert back to the Virtual Directory.