Scott Forsyth has a great explanation of how inheritance works in the ASP.NET configuration hierarchy. I ran into a problem recently when I put a .NET project that just had a bunch of services in the virtual directory of another website. The services project inherited the theme requirement I had in the web.config of my website and since there was no theme folder in my services project is went kaboom.
http://weblogs.asp.net/owscott/archive/2005/12/29/ASP.NET-files-and-inheritance.aspx
Thanks Scott!