Q: I am running IIS7 do I need to create a internal website in IIS7 with the website pointing to the OSTicket directory?
A: Yes. example: I have my osticket in /inetpub/wwwroot/support
Q: Do I need to unzip the OSTicket 1.7 into the inetpub folder?
A: IIS allows you to specify the location of the site. You can put it where ever you want to. That being said I recommend that you put it in a sub directory of inetpub.
Q: Is there any step by step directions with pictures that will walk me through this setup using IIS7?
A: Not that I am aware of, but its pretty straight forward.