I thought I would post a quick update on how I was able to "fix" this issue using CSS attribute selectors.  I was unable to figure out why the folders for this particular Tree Menu was working, so I began to search for a way to add the folder images using CSS targeted at the spans that contained my categories.  I was unsuccessful until I read this article at CSS-Tricks.  Thank you so much to Chris Coyier for writing about this CSS technique!

In order to add the folder icons, I used Firebug to look at the span ID's that were generated for my Categories in the tree.  I noticed that there was a section of the ID on the category spans that was consistent in all of them.  This was "Categoriest".  I then created my rule to target the category spans and added the folder icon as a background.

Here is the attribute selector I used:  .DNNTree span[id*=Categoriest] { }

While this solution does not answer the question of why the folders are not showing in the repository Dashboard in DNN5, this CSS fix will work for now.

Ricardo,
I am glad this technique helped you.  Here is my CSS:

.DNNTree span[id*="Categoriest"] {
background:url("/images/folder.gif") no-repeat scroll left center transparent;
font-size:9pt;
font-weight:bold;
padding:2px 0 2px 20px;
}
.DNNTree span:hover {
color:#4E4E4E;
}
 

You may need to rely on some jQuery or javascript to create a class for the folder you click on if you want to style the selected/current folder. I did not see any indicator in the code generated to easily target it with CSS.