The Applications folder is a container for all application programmes on a Macintosh. While all applications, ideally, are supposed to be stored within the Applications folder, a programme outside of this folder can also run normally (most of the time).
Before Mac OS 9.1Edit
The Applications folder was called Applications on all Macs before Mac OS 9. Most applications were installed into this folder.
Mac OS 9.1Edit
Under Mac OS 9.1, applications for the Classic Mac OS now were installed in the Applications (Mac OS 9) folder -- a very significant move to prepare for the eventual Mac OS X. The upgrade to OS 9.1 precipitated a renaming of the Applications folder.
Mac OS XEdit
The Applications (Mac OS 9) folder was kept for software written for the Classic Mac OS.
In Mac OS X, there is a subfolder inside the Applications folder, named Utilities. This folder contains utility programmes for Mac OS X, such as Console, the Terminal, NetInfo related applications, as well as disk repair programmes.