I never got 2.0.7 to install, but 2.2.6 (current version at this writing) installs beautifully on the above server setup. No warnings, nothing but green light success messages. And everything seems to work after it is done.
The permissions I used were
IUSR: Modify, Read & Execute, List Folder Contents, Write
for the entire site directory.
Then I just stripped it back to Read&Execute and List Folder Contents for the core/core.config.php file after the install.
Note: giving these rights to only the core/config, core/cache, and core/packages directories permitted an installation just fine, but several other directories needed write access for package installation/management, so I gave write/modify access to the whole site.
Friendly URLS using the Microsoft URL Rewrite Module works perfectly too.
Hope this might help someone in the future.