Thoroughly befuddled now, I began to scour the web.config file to see if something had gotten committed that caused this to happen. This was not the case. Ultimately what I found was that Microsoft, in their infinite wisdom, decided that, when picking the default settings for installing IIS7 on Windows 7 RC, people probably did not have static content that they would like to publish on the web, and therefore left the static file handler turned off. Seriously! WTF?!
Anyways, to turn this on, go to Start | Control Panel | Programs and Features | Turn Windows Features On or Off | Internet Information Services | World Wide Web Services | Common Http Features and check the Static Content box.