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1. ASP.NET: Web Site or Web Application?
The Web Site project is compiled on the fly. You end up with a lot more DLL files, which can be a pain. It also gives problems when you have pages or controls in one directory that need to reference pages and controls in another directory since the other directory may not be compiled into code yet. Another problem can be in publishing.
If Visual Studio isn't told to re-use the same names constantly, it will come up with new names for the DLL files generated by pages all the time. That can lead to having several close copies of DLL files containing the same class name, which will generate plenty of errors. The Web Site project was introduced with Visual Studio 2005, but it has turned out not to be extremely popular.
The Web Application Project was created as an add-in and now exists as part of SP 1 for Visual Studio 2005. The main differences are the Web Application Project was designed to work similar to the Web projects that shipped with Visual Studio 2003. It will compile the application into a single DLL file at build time. In order to update the project it must be recompiled and the DLL file published for changes to occur.
Another nice feature of the Web Application project is it's much easer to exclude files from the project view. In the Web Site project, each file that you exclude is renamed with an exclude keyword in the filename. In the Web Application Project, the project just keeps track of which files to include/exclude from the project view without renaming them, making things much tider.
Check the other answers also.
2. Web Application Projects versus Web Site Projects in Visual Studio
]. You will every details here.