ASP.NET is a Microsoft web technology used to create dynamic web applications and services. It allows for server-side scripting, state management, and easy updating of files while the server is running. An ASP.NET file contains HTML, XML, and scripts that are executed on the server before being returned as plain HTML. IIS (Internet Information Services) is the Microsoft web server that processes ASP.NET files. It passes ASP.NET file requests to the ASP.NET engine, which reads and executes the scripts before returning the file as HTML to the browser. Virtual directories in IIS are used to share project folders so that ASP.NET files and applications can be accessed online.