By creating such a file in a directory you will instruct ALP to treat that directory as a root of a virtual WEB server or also called ALP site in the ALP documentation. This will implicitly assume that this is a start point of an ALP application and will apply the default directory settings. In other words to override them you will need to define explicitly an ALP application and directory settings in this directory or some of its sub-directories (if you need to simulate virtual site with many ASP applications). In most cases the default settings are good enough but if your application requires some specific configuration settings you will need to create ALP application or/and directory settings and edit them.
ALP Site is like a WEB virtual site. ALP will present the full path of the root site directory as a host name to the ASP pages in it (and its sub-directories) and the rest of the path will be presented as virtual path in the site. This affects the Request.ServerVariables, Server.MapPath, include directive and the way the relatve/virtual URL used in the HTML are translated.
The application settings are the most important part of the ALP settings. Here you are able to specify how the different file extensions are executed. This means this file tells the ALP what to do with the different files. For example ASP files are mapped to the ASP processor but you can map other file extensions to it as well. All the files that are not managed by a specific ALP module are served by the so called RAW spooler - they are just transferred to the browser. However the RAW sppoler needs to know their content type. So as like in IIS and Apache you have a form that allows you to specify mappings between MIME types and file extensions.
Are the MIME types important? The answer is YES - it is reccomended to review them before deploying your application and correct/add settings for the file types you are using in your application. Windows OS has its own MIME to file extension map in the registry, but you have absolutely no guarantee that it will be correct and the same on all the machines where your application will run. So ALP uses its own application settings in order to avoid problems caused by other software products. By configuring the settings here you will be sure what content type will be assumed for each file type no matter what the local machine registry claims for it.
ALP application is like ASP application on IIS. The major difference is that ALP maintains the application settings in its core and not like IIS in the ASP ISAPI plug-in. So in theory other technologies are able to use the same mechanism without need to implement it. However you do not need to be concerned of this fact as long as you are not involved in development of ALP extensions.
This allows you to specify directory settings for this directory and its sub-directories. They include the default documents and some flags - like permission to execute scripts or browse the directory. This may look a bit strange - ALP runs locally and the security considerations are not the same as on a WEB server. However these settings may help you when building application compatible with both IIS and ALP and also may prevent your customers from accessing the application from a wrong place.