What is web.config ?

Web.config is the main settings and configuration file for an ASP.NET web application.

The file is an XML document that defines configuration information regarding the web application. The web.config file contains information that control module loading, security configuration, session state configuration, and application language and compilation settings. Web.config files can also contain application specific items such as database connection strings.

Configuration settings for any of your ASP.NET Web applications can be stored in a simple text file. Presented in an easily understandable XML format, this file, called Web.config, can contain application-wide data such as database connection strings, custom error messages, and culture settings.

Inheritance
Each web application in ASP.NET inherits their base web.config from the machine's web.config located in \System Root\Microsoft.NET\Framework\Version Number\machine.Config

Interesting Links

A Beginner's view : Web.config

ASP.NET Web.config File Demystified

How To Create the Web.config File for an ASP.NET Application

AppSettings In web.config 

http://www.codefixer.com/asp-net/tutorials/web.config.asp

WEB.CONFIG as auto-created by clicking New Project in VS.net 2003 

<?xml version="1.0" encoding="utf-8" ?>
<configuration>
   
  <system.web>

    <!--  DYNAMIC DEBUG COMPILATION
          Set compilation debug="true" to enable ASPX debugging.  Otherwise, setting this value to
          false will improve runtime performance of this application.
          Set compilation debug="true" to insert debugging symbols (.pdb information)
          into the compiled page. Because this creates a larger file that executes
          more slowly, you should set this value to true only when debugging and to
          false at all other times. For more information, refer to the documentation about
          debugging ASP.NET files.
    -->
    <compilation
         defaultLanguage="c#"
         debug="true"
    />

    <!--  CUSTOM ERROR MESSAGES
          Set customErrors mode="On" or "RemoteOnly" to enable custom error messages, "Off" to disable.
          Add <error> tags for each of the errors you want to handle.

          "On" Always display custom (friendly) messages.
          "Off" Always display detailed ASP.NET error information.
          "RemoteOnly" Display custom (friendly) messages only to users not running
           on the local Web server. This setting is recommended for security purposes, so
           that you do not display application detail information to remote clients.
    -->
    <customErrors
    mode="RemoteOnly"
    />

    <!--  AUTHENTICATION
          This section sets the authentication policies of the application. Possible modes are "Windows",
          "Forms", "Passport" and "None"

          "None" No authentication is performed.
          "Windows" IIS performs authentication (Basic, Digest, or Integrated Windows) according to
           its settings for the application. Anonymous access must be disabled in IIS.
          "Forms" You provide a custom form (Web page) for users to enter their credentials, and then
           you authenticate them in your application. A user credential token is stored in a cookie.
          "Passport" Authentication is performed via a centralized authentication service provided
           by Microsoft that offers a single logon and core profile services for member sites.
    -->
    <authentication mode="Windows" />

    <!--  AUTHORIZATION
          This section sets the authorization policies of the application. You can allow or deny access
          to application resources by user or role. Wildcards: "*" mean everyone, "?" means anonymous
          (unauthenticated) users.
    -->

    <authorization>
        <allow users="*" /> <!-- Allow all users -->
            <!--  <allow     users="[comma separated list of users]"
                             roles="[comma separated list of roles]"/>
                  <deny      users="[comma separated list of users]"
                             roles="[comma separated list of roles]"/>
            -->
    </authorization>

    <!--  APPLICATION-LEVEL TRACE LOGGING
          Application-level tracing enables trace log output for every page within an application.
          Set trace enabled="true" to enable application trace logging.  If pageOutput="true", the
          trace information will be displayed at the bottom of each page.  Otherwise, you can view the
          application trace log by browsing the "trace.axd" page from your web application
          root.
    -->
    <trace
        enabled="false"
        requestLimit="10"
        pageOutput="false"
        traceMode="SortByTime"
        localOnly="true"
    />

    <!--  SESSION STATE SETTINGS
          By default ASP.NET uses cookies to identify which requests belong to a particular session.
          If cookies are not available, a session can be tracked by adding a session identifier to the URL.
          To disable cookies, set sessionState cookieless="true".
    -->
    <sessionState
            mode="InProc"
            stateConnectionString="tcpip=127.0.0.1:42424"
            sqlConnectionString="data source=127.0.0.1;Trusted_Connection=yes"
            cookieless="false"
            timeout="20"
    />

    <!--  GLOBALIZATION
          This section sets the globalization settings of the application.
    -->
    <globalization
            requestEncoding="utf-8"
            responseEncoding="utf-8"
   />
  
 </system.web>

</configuration>