In music context it's often used when a VST-instrument can be played outside a host-program. The VST is then launched from a bundeled EXE-file.
It can also mean that plugins that otherwise are bundeled with music programs can be used in other music programs.
For example what Image-line just did with the FL Studio plugins.

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KORG KARMA Music Workstation
Roland JP-8000
SONY MDR-7506
ECHO MIA MIDI
STK VX-804FX console mixer
THX Audio ST-90 Studio monitors
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Standalone applications are application that require no host to run them.

Most VST instruments are also sold as standalone applications, so it enable you to play with them without having cubase, fruityloops or any other host installed.

This is the case for most of native instruments products (reaktor,FM7,pro53...)

I don't know how you can record them this way but it can be useful if you don't want to waste cpu with a full host opened for live performances or if you are just trying to find a catchy melody.

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Entice