I currently have 2 x ASP.NET 3.5 web applications in IIS7 (lets call them WebParent and WebChild).
WebChild is nested within the WebParent listing in IIS7 and is set
I think the inheritInChildApplications="false" is good for cases where you still want to inherit some part of the configuration from the parent. In cases where you want to completely stop inheritance (as in this case if I'm correct), I'd suggest to use 2 separate application pools for the 2 apps and then apply a not very well documented setting in the applicationHost.config file as I explained in this question “Entry has already been added” - Two Separate App Pools