An application is stand-alone program. It runs in a window in the operating system it's being run on. The nifty thing about Java is that it's cross-platform; the same code will run on multiple operating systems.
Applets are those Java thingies that are embedded into webpages. You know how sometimes you'll go to a webpage and a Java applet has to load to do some nifty thing on the WWW? Those are applets.
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