In a modern two-tier architecture, the server holds both the application and the data. The application resides on the server rather than the client, probably because the server will have more processing power and disk space than the PC.
In a three-tier architecture, the data and applications are split onto seperate servers, with the server-side distributed between a database server and an application server. The client is a front end, simply requesting and displaying data. Reason being that each server will be dedicated to processing either data or application requests, hence a more manageable system and less contention for resources will occur