Im having issues doing this. and when i remove the authentication from the swf/web.config it still doesnt seem to be applying to the child website at all. Whats the proper way to set a child website? Thanks!! 

The lower most web.config overrides all previous settings. So if you remove the section from the /swf/web.config whatever settings you have in the web.config in the next higher level will have an effect on the content of the child folder.

So instead of removing a section, try giving appropriate settings in the /swf/web.config.