I was getting this error after making a local copy of my remote DNN site:

It is an error to use a section registered as allowDefinition='MachineToApplication' beyond application level

The problem was that the remote site had a folder called /config that contained a newly created web.config file. Presumably, this folder has been automatically ascribed application status on my remote site. I had to make this folder an application on my local IIS as well to be able to recompile it in VS2005.

Anyone know why this is happening. and is my solution the right one (well, it works, so it must be right, but should I have just deleted the web.config?).

You are right. Every time I synch my site back to my local system in fact. I now delete the Config/web.config and all is well again. Thanks!