The files are skinned as lists and small icons... I keep them set to medium icons so I can see them
I know what you mean now. I just had a look at my Icons in Explorer (I usually have set it to "list") and I noticed that when setting it to "medium" and "large" IconPackager applies the 'LiveFolders' for Vista.
This is (to my knowledge) completely normal but it seems that IP is a bit slow applying the LiveFolder-icons, and when scrolling down it becomes visible that the normal Folder-Icons (the same ones that would be used by XP) are replaced by the Vista LiveFolders. These Folder-Icons are designed to show you also the content of the folder; for example a folder that contains mostly pdf-files, will have a pdf-sign embedded within the LiveFolder.
I also have to add here, that not all IconPackages are Vista ready yet and do not have the LiveFolders skinned. This is where IP will use the default Windows LiveFolders.
However, in IconPackager, on the LiveFolders tab you can set IP to choose certain LiveFolders from an IP-pack that has them included.
Someone please correct me if I'm wrong.