See "Comparing Web Site Projects and Web Application Projects" on MSDN
http://msdn.microsoft.com/en-us/library/aa730880(VS.80).aspx#wapp_topic5

and Google
http://www.google.com/search?q=asp.net+website+vs+web+application

The web site template does a single compile per page. This makes it more
flexible if you have to update a single page, but this, in and of
itself, is a potential maintenance nightmare, as you are not deploying
full websites. There is a checkbox when compiling a web application that
allows a similar deployment strategy (keep same names option, when used
with the compile each page as a separate assembly option), although this
is not intuitive like the web site.

The web application model is used more and more, as it allows
precompilation (although not pre-jitting) of the site. As we move into
.NET 4.0, which also has better deployment options, the web application
will truly rule the day.

Alexy has some links you can look at for more information, although I
don't see all of the gotchas included. If you use Profile, for example,
you can end up with some pain if you use a web application, as the
system gets confused at times (this is not true if you use a custom
Profile provider, but the default, out of the box, often fails - NOTE:
If you are not using the default Profile bits, you are fine here).

Peace and Grace,

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