It's simplest just to try replacing it. If the replacement works, the old one was faulty. If it doesn't, the old one is probably OK.
Here's how to connect a 7805 into that position. You need to cross over two of the leads. This will be tricky because they're flat metal, not wires, and they're not flexible that way. You will also need to make sure they can't touch together where they cross - either by bending one up and one down, and making sure that when the leads are soldered into the board, they are rigid enough that they can't move and make contact, or by putting some insulating sleeving (taken from some insulated wire) on one or both leads.
The fourth hole is not used with the 7805.
Here's how to remove the old IC701. Unscrew the mounting screw and bend the device gently until it's easy to grab onto. If possible, avoid getting the white goop on your skin. Clean it off the IC with a rag or cotton swabs.
Turn the board over and find the four connection points. You need to melt the solder on these, one at a time, and add plenty of extra solder on them to join them together (temporarily). Don't hold the soldering iron on the board for more than 4~5 seconds at a time, and then allow time for everything to cool down enough that you can hold your finger against them. Once you have plenty of new solder and it's flowed onto all the old solder, let it all cool down again, then use the side of the bit to heat up all four pads at once, and with your other hand, pull the IC out of the board.
Let it all cool down, then remove the solder from each pad using either a solder sucker or a solder blower ("desoldering bulb"). Printed circuit boards vary in quality but are not really designed for rework and repeated high temperatures. Always be careful to minimise the duration of contact between the soldering iron and the circuit board, and try not to slide the iron around on the copper pad. Heat up the pad, get the sucker or blower ready, move the iron away, move the sucker or blower onto the pad and push the button or squeeze the bulb.
Desoldering bulb (USD 6):
http://www.radioshack.com/product/index.jsp?productId=2062742
Solder sucker (USD 10):
http://www.radioshack.com/product/index.jsp?productId=2062745
Solder sucker (USD 20):
http://www.radioshack.com/product/index.jsp?productId=17241906
You may want to initially solder the 7805 just loosely onto the board and leave it standing up, so you can find out whether it fixes the problem or not. Then you have the opportunity to install it properly, or remove it and reinstall the original.