This post was imported from my old blog and had 3 comments which are included as a screenshot at the end of this post.
This one has burned me a few times, so here is how it works for future reference:
Usually, when I add an Image control into a Silverlight application, and the picture it shows is local (as opposed to loaded from the web), I set the picture’s Build Action to Content, and the Copy to Output Directory to Copy if Newer. What the compiler does then is to copy the picture to the bin\Debug folder, and then to pack it into the XAP file. In XAML, the syntax to refer to this local picture is: