I think what you've done is great (don't get me wrong) but obviously I'm not the only person who dragged files into the SkyDrive folder NOT thinking it was going to act like a normal folder and actually MOVE to files. It was scary for a minute there before I realised what had happened.
I'd be happy if SkyDrive simply gave me a folder-like window that showed me everything on my SkyDrive and let me drag stuff into it. Basically I'd like to be able to use SkyDrive like an old fashioned FTP client, likeFileZilla. If the website let me upload entire folders and choose more than one file at a time I wouldn't even need to PC client.
The way it works now (without your ShellExtension) you have to Copy and Paste files/folders to the SkyDrive folder if you want to keep them in their original location which of course is a waste of drive space because you end up with 2 copies of everything.
I'm sure the way it works now is great for certain people but it's just still not what I expected. I guess I'm not an "average user"
On the contrary, I think most people will see the Skydrive folder in explorer and think that it is just a regular folder in the cloud. I do agree that a Live Mesh method of choosing folders to sync to Skydrive is a much better solution that a Skydrive folder. I'd love to put my photos and music up there, but I want to keep them where they are on my local drive. I'm sure MS will have an answer to this before Windows 8 ships.