Well, it clearly states "add folder to library" and as can be seen from the screen shot, that is how I added the folder "Vista Icons" which is where I have all of my personal icons stored. Don't know why it does not work the same for you! The way I am reading her request is that she wants to have access to different icons for the dock shortcuts. If I am wrong than I digress.
You may be correct, I just can't get a folder shortcut from there only an exe. Except for one that is listed like My Documents which you can check the Show Folder as Menu. What ever works I guess.
You have something in th e Start In. Did you type that in there and that is how you were able to do it.