A number of programmers I work with have ISAPI_Rewrite 3 set-up on their local machines with IIS7 and it works extremely well. I've just created a new website and ISAPI_Rewrite 3 works there as well with no issues. But a colleague of mine did the same thing (added a third website to IIS7) and the new website doesn't seem to want to use the .htaccess file.
I've checked to make sure that all the virtual folders are set-up correctly and the IUSER and System users have the proper access rights.
I am wondering if there is something that I might have missed?
This doesn't answer getting your v3 to work, but I had a similar issue at a client, and the solution seems to be Helicon Tech recommends upgrading to Helicon Ape on IIS7. We did it without much trouble, since the v3 rules are the same.
We did have to add/uncomment a setting to get the HTTP_X_REWRITE_URL server variable to work. See http://www.helicontech.com/forum/15523-How_do_I_get_HTTP_X_REWRITE_URL_using_ape.html