Difference between Software and Applications?

Went to an Apple Store to buy an iPod for Mother's Day. See a bunch of iPads. "these'll be fun to play with" my Dad and I thought. and we did. I go on a mini rant about lack of USB, and my Dad asked a store lady about it. "The iPad doesn't have USB because it uses applications, not software".
From my limited computer education, I've been taught two things make a computer work: The physical hardware, and the programmable software.

So what is this lady trying to say?