Since it was working, and it is working with new folders that you set up, I think a bug submission with logs is in order. Instructions for how to file a bug with logs is here:
Sticky: How to Submit Bugs and Live Mesh Logs
Once you've filed the bug with logs, you may want to disable sync for the devices and then remove the folder from the Mesh before setting it back up again. Be sure to backup the data contained within the folder in case of problems.
-steve
Microsoft MVP Windows Live / Windows Live OneCare & Live Mesh Forum Moderator