Nor does it work with video files AFAIK. It's especially problematic when you are viewing icons that are 16x16px (details view or small icons) when it doesn't show a filetype icon, but rather the thumbnail (which is useless with 16x16 icons).
I've done a bit of messing around, and I have found some of the icons in imageres.dll that are used in live folders. However, I don't think we'd get very far by simply editing these though (due to the way Windows renders live folders). I think it would be better to fully disable folder thumbnails whilst not messing with picture thumbnails somehow. I'm sure some modification can be made to imageres.dll, but I currently don't know how it would be done.