I'm helping a co-worker with an issue he's having on his recently re-imaged workstation. He had a fresh install of Windows 7. He installed Visual Studio 2010, then Visual Studio 2008 (in that order, for reasons unrelated to this question), then tried to open a legacy solution we have in either one.
The web projects (project file and everything, not "web site" in Visual Studio terms) in the solution failed to open because they have a hard dependency on virtual directories on the local IIS. Turns out IIS wasn't installed.
So he added IIS via the usual "Windows Features" or whatever they're calling it these days, the old "Add/Remove Programs" sort of thing. Then ran aspnet_regiis /i for v4 of the framework. Ran Visual Studio 2010 again (as an Administrator explicitly) and tried to open the solution, web projects still fail to open. Ran aspnet_regiis /i for v2, tried in Visual Studio 2008, still no luck.
As a test, he tried to create a new "web site" in Visual Studio 2008 and set it to create on HTTP and gave it a local address (http://localhost/testapp), so it should create the virtual directory in IIS. However, it instead gave us this error:

I'm not much of an IIS expert or a Windows administration expert, so I'm a bit stumped on what the problem is. Is there something additional we need to add from the Windows Features? Did regiis not work? What do you recommend?