Application pages are very different to site pages. Application pages live exclusively on the physical file system of each SharePoint server, usually under 14\Templates\Layouts, and are available under every single site in your farm under http://mysitenamehere/_layouts/.
Site pages can be provisioned to the filesystem, but their content lives in the content database. When a user customises or "unghosts" a site page (in SharePoint Designer), the layout of the page (its entire .aspx content) is put in the content database too.
The main differences:
* Application pages have no content of their own
* Application pages cannot have web part zones (although you can embed a web part in the aspx portion of the page as a server control if you want)
* Application pages cannot be edited in Designer or the browser.
* Application pages are visible under every site in your farm.
* Application pages are mainly used for configuration pages
* Both Application and Site pages can use master pages. Application pages get a "dynamicmasterpagefile" property instead of a "masterpagefile" on their @page directive.
Unless you're creating configuration pages for things, then you should usually create site pages.
Hope this helps,
Joel's SharePoint Architect Blog
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