An AppDomain basically provides an isolated region in which code runs inside of a process.
An easy way to think of it is almost like a lighter-weight process sitting inside of your main process. Each AppDomain exists within a process in complete isolation, which allows you to run code safely (it can be unloaded without tearing down the whole process if needed), with separate security, etc.
As to your specifics - if you run code in 2 different AppDomains within a process, the code will run in isolation. Any communication between the AppDomains will get either serialized or handled via MarshallByRefObject. It behaves very much like using remoting in this regard. This provides a huge amount of security - you can run code that you don't trust, and if it does something wrong, it will not affect you.
There are many more details in MSDN's description of Application Domains.
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