I would look at a couple of things:
I don't know if this will work in VS2005 - I am using VS2008 and it solved my problem. If you are using VS2005, give it a try - can't hurt :)
1. In VisualStudio select your Setup application and look at the "Target Platform" setting under the Project Properties. Make sure it is set to x32 if it is to be installed in a 32-bit environment or make sure it's set to x64 if it is to be installed in a 64-bit environment.
2. Right-click the Setup project and go to "View | Launch Conditions".
3. Under the "Launch Conditions" folder select "IIS Condition".
4. Look in the Properties for the "Condition" value
5. If it is set to "IISVERSION >= "#6" then you are saying that this application can be installed for either IIS6 or above.
6. If you want to keep it only installable on IIS7 or above, you should set it to "IISVERSION >= "#7"
Note that Windows Server 2008 R2 has an IIS Version of 7.5
HTH