I'm using Titanium 1.2.1 and the app icon isn't shown in the emulator. I changed the directory and "repath'd" it in the "Edit" part. I also checked it in the ti_app.xml file, the path is still correct. Why isn't the icon shown in the emulator?
To speed things up Titanium creates an XCode project for your application but rarely refreshes it and that includes when you change settings like project description, icon, etc. To fix this you have to go into your project folder build/iphone and delete the contents but leave the iphone folder. This will force Titanium to do a full build when you try to run the application again.