It does. Once you change the icon within Folder Organizer, go back to your home screen. Each launcher is a bit different, but now you need to get however you get widgets on the phone.
On my phone (MIUI Launcher for ADW stand-alone app), I tap "menu/add/more/custom shortcuts". There, you will see Folder Organizer Item or Folder Organizer Link. (Link is if you put groups in folders in Folder Organizer, with a custom icon...)
You want Folder Organizer Item. Tap it. It should open FO, find the app you want (you should have already changed the icon...) and tap it. It should be on your homescreen w/your selected icon.
Also, any jpg you want can be an icon. I found a picture of a Tiffany's Gift Box, downloaded it, and use it for my market/play store icon....
If you need more help, shout (or pm or gtalk....unfortunately, I have no life, so I am always here!)
