I know this may sound stupid but when working with the WP7 ApplicationBar make sure the images you are using have the following properties:

Build Action: Content
Copy to Output: Copy always (or ‘Copy if newer’, either should work)

I spent a half an hour trying to figure out why my application bar was showing an “X” instead of the image I was putting in IconUri. When first adding images the properties default to:

Build Action: Resource
Copy to Output: Do not copy

Since the application bar is referencing the image by Uri it can’t seem to find it embedded in the application.

My xaml looks like:

<phone:PhoneApplicationPage.ApplicationBar>
    <shell:ApplicationBar IsVisible="True" IsMenuEnabled="True">
        <shell:ApplicationBarIconButton
            IconUri="/Images/appbar.feature.settings.rest.png"
            Text="Settings"/>
    </shell:ApplicationBar>
</phone:PhoneApplicationPage.ApplicationBar>