By default in .html and .htm files #include virtual does not work in IIS7. I was unable to find the answer quickly on google so I figured I should document it here.

Enable Server Side Includes for IIS7

Control Panel > Programs and Features > Turn Windows Features On or Off to add the component

Now open IIS7 and in features view go to Handler Mappings

Under actions select "Add Module Mapping"

Enter the following information:

Request Path: *.html
Module: ServerSideIncludeModule
Executable: blank
Name: SSI-html

Click Ok and now your includes should function properly.