I had a need to setup multiple websites in Windows 7. I needed it so I could basically do the following on my local machine
http://website1
http://website2
http://website3
This way I could replicate how it would be on the production servers these sites were on. Now most of the time I don't do this. Usually I just create site after site under the Default website location.
Another note I did was I made different application pools for each individual website.
so here are the steps I took. If you want to skip the rest of this post and you are having problems...make sure to edit your host file! I always forget this for some reason.
Anyway here we go.
First step is to add a new website to IIS. One important note here is I chose to set the connection to use my local credentials instead of network service. To accomplish this, click on the "Connect As" button and enter in your username and password your login into your computer with.


At this point a new application pool was created for your website. As you can see the framework is set to 2.0 by default. Switch this if you would like to 4.0. Another note, you may need to switch the Identity the application pool runs under. For example, you may need to switch it to run under the Network Service.
NOTE: You may need to give the account the application pool is running under and the Anonymouse IIS Account access to your directory where the website is located.

OK the next step is to edit your HOST file on your local machine.
Browse to the following directory on your machine (assuming the OS was installed on C:\)
C:\Windows\System32\drivers\etc
First make a copy of the current hosts file in the directory so you have a backup.
Next you are going to want to add the entry of your new website host name. In the case of this example "Website1"


Next you may want to logoff or reboot and now you should be able to browse to http://Website1 and be good to go.
Good luck!