A: 

How'd you get the image into the project? I'm guessing it has to do with some color being misinterpreted as an alpha channel. I'd save the icon you want as a .PNG to see if that fixes it.

Mark P Neyer
The icon was a PNG to begin with. And I even changed it from 8-bit grayscale to full 32-bit image - but no luck. I even tried deleting any non-important chunks leaving just the data because some MS products (like IE) have gamma issues. But nop. The weird thing is - the image when imported in the forms resource is getting messed up. But even if I modify the resource file "by hand" and fix it, it does not help.
Vilx-
I tried exporting the messed up version and comparing it to the correct version - seems that the alpha channel for the outline of the icons is reset. But some other pixels have their alpha channels correct. Weird...
Vilx-
A: 

D'oh! Found it!

The MenuItem's TransparentColor was set to black, so it made the outline of the image disappear (which was black with about 50% transparency)!

Vilx-