I'm currently working on a project that utilizes Telerik AJAX controls, and I was required to create a new application that was to be setup as a child application to the primary project in IIS7 like so:

The child application needed to be configured in a way that it did not inherit the parent web.config values.  In researching the approach to take for this, I found this article over on Rick Strahl's blog about stopping inheritance to child applications.  Basically, in your root web.config, you just wrap the settings you don't want to inherit to the child application with a location tag and set the inheritInChildApplications property to false.

You get the idea.  Unfortunately, the Telerik AJAX controls do some kind of web.config parsing to determine that the appropriate handlers are set up for the AJAX controls to work correctly and they don't know how to handle a location section in the web.config.  If you dig through the documentation on Telerik's site, you might come across this FAQ which tells you how to accommodate this scenario.  Their solution is for you to set the EnableHandlerDetection property to false on the RadScriptManager wherever that is used.  You'll also need to set that property on the RadStyleSheetManager if you use that.  Annoying, but it works...  If you know any other approaches to this, please let me know!