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Custom controls are compiled into their own assembly(.dll) where as user controls are not. User controls are compiled into the web application project's assembly that contain them.
Custom controls can be added to toolbox where as user controls cannot be added.
User controls are easier to create as they are similar to creating web pages. Custom controls are relatively complex, as there is no designer, and every thing has to be done in code.
A separate copy of user control is required in each application you want to use, where as a single copy of custom control can be used in multiple projects.
Please Note: When you drag and drop, a custom control, from the tool box onto a web form designer, the following 2 things can happen
1. If the custom controls assembly is not installed in GAC, then custom controls assembly is copied into the "BIN" folder of the application. So, in this case, if you need to use the custom control in multiple applications, then a copy of the custom control's assembly, will be made into the "BIN" folder of every application.
2. If the custom controls assembly is installed in GAC, then custom controls assembly is directly referenced from the GAC. So, in this case, a single copy of custom control can be used in multiple projects.
To learn about installing assemblies into GAC, please watch the following parts from Dot Net Basics Video Tutorial
Part 3 - Strong Naming an Assembly
Part 4 - What is GAC? How and when to install an assembly into GAC
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