Actually, there are several definitions for this term. Depends who's using it.
The poster directly above me is correct in that it can mean the application of dramatic theory in a hands-on way: actually DOING what you're learning about.
In my particular subfield (drama and theatre education), Applied Theatre is the use of theatre to accomplish nontheatrical objectives. Using performance with people who are incarcerated, for example, as a tool to open up discussion. Or creating performance with homeless teens as a way to give them voice and expression for their experiences. As these examples imply, Applied Theatre in this context is often about using theatre to address social issues.