In simple terms, an applet runs under the control of a browser, whereas an application runs stand-alone, with the support of a virtual machine. As such, an applet is subjected to more stringent security restrictions in terms of file and network access, whereas an application can have free reign over these resources.
Applets are great for creating dynamic and interactive web applications, but the true power of Java lies in writing full blown applications. With the limitation of disk and network access, it would be difficult to write commercial applications (though through the user of server based file systems, not impossible). However, a Java application has full network and local file system access, and its potential is limited only by the creativity of its developers.
Posted in: Java