There are numerous articles out there about how to change the system master page. The one that all pages in the _layouts aka LAYOUTS folder use. In most cases they want to do this to enable a different datasource for the top navigation aka global navigation. The average rookie who is in charge of creating a site in MOSS using the publishing feature will stumble across this problem and start hacking away at either the original application.master, or even go and implement a custom http handler to exchange the application.master with a custom one on the fly. None of these approaches are best practice nor are they supported by MS. So is it impossible to fix without breaking the system? Not at all.
I've published a solution to www.sharepointmythbuster.com! It will allow you to replace the top navigation on the fly for all pages in the site collection, including those horrid system pages and application pages.