In the below test case a div with font-size: 2em contains a span with font-size: 0.5em (aqua background). As a result the text in the span has the same size than in the body.
The same does not happen to the line-height: the div has a 'normal' line-height based on a 2em font size, and this still act as minimum height for the line boxes in the div, even if all its inline boxes have a smaller height (not so sure about this interpretation). See line height calculations.
The above is true in all browsers except IE7-.
In transitional and quirks mode the line-height of the div is ignored, the height of the line boxes is the 'normal' line-height based on the font size of the span. This is somewhat similar to the fact that in transitional and quirks mode a block containing only an image has just the height of the image, while in standards mode it behaves as if some text were present, with the text properties in effect on the block itself.
If the span has display block, the line-height is back to the normal: line boxes inside the span have a minimum height equal to a 'normal' line-height based on a 1em font size.
Like the first case, but with white space between div and span tags. Makes a difference in IE7- only where the last line gets a double line-height.
This page in transitional mode font-size, inline elements, line-height - Transitional, in quirks mode font-size, inline elements, line-height - Quirks