Apologies for that -- you have a much better handle on the situation than I gave you credit for. Is it just app store applications that are misbehaving? Are you using winterboard to switch the icons or are you editing them directly in the application's folder?
Np. You've actually got me to test that. Thank you. From what I gather it seems that the typical iPhone icons that come standard with the OS are able to be small in size (16x16 and such). I have just changed the Stocks.app icon to a 16x16 icon and it worked fine. I tried this same 16x16 icon on Tap Tap downloaded from the App Store and was unsuccessful. The icon was stretched to it's original size.
Perhaps there's another way to edit an App Store icon to shrink it's size without making a transparant icon of original size and placing the smaller icon inside.
I like the reaction of the other System icons as they only register the touch on the smaller 16x16 (etc) area and not the 60x60 transparant square. Though I may have to cave for the time being if I can't find a solution.
My current ways of changing icons are with iFunstastic (really awesome problem in my books) and while I'm at work, I ssh to the phone and replace the icon.png. Winterboard I use but only to install the themes I create in iFunstastic.
Hope that makes sense lol. Trying to type this quickly at work.