1) does the music switch on and off ambiently as reported?

2) Can you leave it on full time as background music like Oblivion?

3) What categories are the music folders divided into?

1) Yes
2) there should be an ambient/travel soundtrack that will play on loop when walking around in the wilderness cells, other than that it is up to the game to decide when certain tracks play. I've noticed that the ambient track will play for most of the game.
3) Usually under the music folder they will divided by the scenario in which each plays aka the fight music will be in a /fight folder with a list of tracks, while the bard music may be in a /inn folder

Thanks. So I can move my own mp3 tracks to those folders?
Let me get this right? The wilderness ambient music works but cities, inns and dungeons don't loop in those environs anymore?