Hi,
I have the same issue as the initial requester. Even after the last update it no longer works.
When choosing the Custimize on the folders properties, the bottom option is to change the folders icon, not the image, but the icon.
By default it's yellow folder-map. On choosing "Change Icon", you can select another folder from the shell32.dll, or browse for another icon-file to be used. Selecting an custom icon, displays the content of the icon, and pressing ok should make that icon to reflect that specific folder.
Unfortunately that is no longer the case, only the shell32.dll icons work. At least, as long as the icon-file is not in the same location as the folder. If I put the icon-file in the folder, and select it, the icon is displayed.
This should be fixed.
Make sure it's possible to use any icon, independent of it's storage location.
Update: It does work, however the icons need to be on a local hardrive. When they are in a Shared (network/nas) driver it does not work. I created an icon folder, storing the icons I use with folders and shortcuts, within my pictures folder. Even after hiding that icons-folder, it still works.