I've experimented some more, and I cannot make the behavior be consistent with edits, but it is consistent with me for folders and it SOMETIMES works on top level folders.
First, it seems to work fine with TIF's, not raw files (specifically for me NEF's).
If I start with an empty lightroom catalog, import a TIF from a directory, and right click/edit in CS3 I AM prompted for the "edit copy" with option to stack.
If I start with an empty catalog and import an NEF from a directory, right click, I am NOT prompted. In that case if I edit and save as I come back to Lightroom I see the same drive letter and folder duplicated on the left, one with the original NEF and one with the Edit.
Not sure if related or on purpose, but I also tried this. Create this structure:
c:\scratch\junk\picture.nef
Now create two separate LR Catalogs, and each time do an import of the entire directory, but
1) Import C:\SCRATCH all
separately in a different new catalog
2) Import C:\Scratch\Junk all
I would expect these to produce the same result, frankly, but they do not. The former produces a structure on the left of:
C:
Scratch
Junk
The latter import produces only the bottom directory:
C:
Junk
The reason I mention this in the same thread is that one of the things I observe with the import to CS3 is that if you have done the former (building the c:\scratch\junk levels in the library view), and edit, when it comes back for me and produces the extra drive on the left, it looks like this:
C:
Scratch
Junk <<< original shot
C:
Junk <<< CS3 edit shows up here
They are, in terms of actual windows directories, exactly the same of course, but the library folder display shows separate drive letters.
You can also produce the above by a drag-and-drop type import (drag from explorer into LR in a subfolder not a top level folder).
I am coming to the conclusion, however, that this folder display anomoly is not related to the edit-in-CS3 problem, but a separate bug that manifests in edit because it is returning a file in a similar fashion to a drag and drop.