This might hold true for both versions 1.6.x and 1.7.0 of Zabbix. When a Zabbix admin links a template to another template, the "Application" groups are link with the items which is the correct behavior. But if a template is linked to a host, the "Application" groups are not linking with the item keys. The applications have to be created and applied directly to each item key for each host. Is anyone else seeing this behavior? Sort of not fun when you have a whole bunch of host that have to modified. 
If we do a mass copy to the host directly, the application groups are created too but this defeats the purpose of templates.

If we do a mass copy to the host directly, the application groups are created too but this defeats the purpose of templates.
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