This post is simply to avoid the invetiable. As time goes on more and more people will attempt edits of their application.master page as well as other pages within the _layouts directory.
Before you do be make sure you fully understand the possibile consequences, some important things to realize are listed below:
1) Microsoft does not support editing default (file system) pages, they can easily be overwritten during updates, patches etc. Please make sure everyone (This includes management, developers, customers – everyone) is aware of this.
2) SharePoint Designer 2007 can and does make automatic changes to page tokens and references which can break pages within your _layouts folder. In the event that you find yourself starting at an error after editing your application.master page in SPD, now you know why. Check the page changes (at the top of the page).
For those that have no fear and realize the potential threats editing these pages cause, please make sure you have a VERY solid back-up story and that it’s followed.
This post was mostly to point out the fact that SharePoint Designer 2007 does make automatic changes to pages without your knowledge – these changes can and do break the pages within the _layouts folder on the servers file system. Hopefully there will be options for “no automatic” code changes, or “warn before all” in the final builds.