Hi Martin,
We have looked at thousands of kml files containing models which work very well
in ArcGISExplorer.
I agree with you comments that "projection" should not play a role with the
problem you are experiencing.
Its a little surprising that removing the <IconStyle> stuff improves the situaltion.
The <IconStyle> should play no role with the problem you are experiencing.
Now, the above comments apply to the world of "should". It would be great
getting our hands on a Kml file exhibiting the problems you are experiencing.
We would love taking a look.
Kind Regards,
Joe Metzidis
ESRI - Kml Software Developement