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I have upgraded two old (VS 2003/2005) projects to Visual Studio 2008. One is a web service project, and the other is a web application that references the first one. They were running on XP developer boxes and Server 2003. I'm trying to get them to run on my Windows 7 box with IIS 7.

When I try to add a reference to the locally running web service to my ASP.NET web application, I get the following error:

Error Code 0x80070005 

Config Error Cannot read configuration file due to insufficient permissions  

Config File \\?\C:\Users\buggieboy\Documents\Visual Studio 2008\Projects\MyWs\web.config 

Requested URL http://localhost:80/MyWs/MyService.asmx 

Physical Path C:\Users\buggieboy\Documents\Visual Studio 2008\Projects\MyWs/MyService.asmx

Logon Method Not yet determined 

Logon User Not yet determined 

A search on the error says to add the inaccessible files to the IIS_IUSRS group. (I appear to have no such group) and use Basic Authentication (I see Windows and Forms authentication in the IIS manager, but no "Basic".)

What do I need to configure in order to add this web reference to my project?