The following relates to the Philips terminology. Other chip manufacturers use IAP and ISP differently.

In IAP the code to program is only coming from the device itself. In ISP the code to program is coming from some outside source.

The ISP code isn't any different to the user code. Both the ISP code and the user application code (which both execute on the device) may use IAP.

If the user programs code that performs any kind of operation into the device serially from say a PC, then that is ISP. It is irrelevent what the code programmed does.

The easiest way to implement ISP on a device with IAP is to build the ISP on top of the IAP. That is how Philips, Atmel, Infineon and probably some others do it.

Andy