Laravel applications use a .env file to store environment variables as key=value pairs. When the app starts, Laravel reads this file line by line, setting each key as an environment variable with its string value. In the code, the env() function retrieves these values as strings. For example, env('APP_NAME') returns the string set in .env. Boolean values like 'true' are strings and need conversion if used as booleans. If a key is missing in .env, env() returns null or a default if provided. This system allows easy configuration changes without modifying code. The execution table shows each step of reading .env lines, setting variables, and using them in code to configure the app behavior.