Site pages are those that support user customization by using tools such as SharePoint Designer. The downside of customization is that it affects scalability.
Imagine a large SharePoint environment with a Web application running thousands of sites. What would happen if the site administrator of each site modified the site’s home page with the SharePoint Designer? Every one of these site pages would become unghosted (customized). This would negatively impact scalability by forcing the front-end Web server to retrieve each page separately from the content database. Each page would also have to be individually parsed and loaded into memory.
Also consider the fact that once a site page has been customized, a copy must be stored in the content database. This brings up a security concern. Imagine a situation in which a malicious user who has been granted site administrator permissions within a site collection tries to mount an attack by writing in-line code within a customized version of a site page. This security concern is mitigated in SharePoint by having a default policy that prohibits in-line scripting in site pages. The default policy also runs site pages in a no-compile mode, which means they are not compiled into DLLs.
The key point here is that customization support for site pages brings with it performance concerns and security issues.
Application pages avoid these concerns, they do not support customization.
The standard Site Settings page (settings.aspx) is a good example of an application page. It can be accessed from any site, yet it does not support customization. Application pages are deployed as physical files on the 12 hive of the file system.
Because there is only one version of an application page scoped at the farm level, it can be compiled into a single DLL and loaded into memory once for each Web application. Besides, application pages are not subject to attack from users who have permissions to customize site pages. So, SharePoint does not prohibit them from containing in-line code.
Application pages are used for administrative functionality in SharePoint