There're 2 possible issues:
a. This line looks suspicious "(4) RewriteCond: input='D:\MYPATH\favicon.ico' pattern='!!-f' => matched", since you specified "!-f". This may indicate that you played around and did the double registration (possible under IIS6 only). Or have something else installed from Helicon.
b. ISAPI_Rewrite may have issues with permissions. It does not allow ISAPI_Rewrite to see if the file is real or not(List Folder content permissions), so it redirects EVERYTHING. Try to follow this - http://www.helicontech.com/isapi_rewrite/doc/security.htm