Logging this here for future:
If you see the following error message in Visual Studio
"Visual Studio .NET has detected that the specified Web server is not running ASP.NET version 1.1. You will be unable to run ASP.NET Web applications or services."
Then try the following. Check if you have the customErrors element in web.config set to "On". If so, check if the defaultRedirect attribute is set to a page that is not mapped to the aspnet_isapi.dll in IIS (for example a page ErrorPage.htm would not, by default, be mapped to the aspnet_isapi.dll). If so, then the cause of the Visual Studio error is due to Visual Studio not finding the "X-AspNet-Version: 1.1.4322" header when the errorHandling page is requested.
When Visual Studio tries to open a web project it sends a request for the file "get_aspx_ver.aspx". This file does not exist, however, as it is handled by the aspnet runtime it will return the "X-AspNet-Version: 1.1.4322" header and a status code of 404. When you have set the customErrors to "On" in web.config, the missing file generate an error and will result in a 302 to the defaultRedirect page (or if you have setup a 404 handler in the customErrors section).
You can safely click on the Ok button when you see this dialogue.