The study of thermal radiation from isolated neutron stars (including radio pulsars, radio-quiet neutron stars and magnetars) can provide important information on the interior physics, magnetic fields, surface composition and other properties of neutron stars. The new generation of X-ray telescopes are bringing great promise to such study. Understanding the properties of matter and radiative transfer in strong magnetic fields is essential for the proper interpretation of the current and upcoming observations. I will discuss current theoretical work on modeling magnetized neutron star atmospheres/surface layers. Of particular interest is the effect of the strong-field vacuum polarization, which dramatically changes the radiative transfer and the emergent X-ray spectra from magnetized neutron stars. Recent observations may have already revealed such vacuum polarization effect at work in some magnetars.