Here on this site, I ran into the problem of using images, in this case favicons, with text in link lists. For some reason the wp_list_bookmarks() function in WordPress does not allow link text to be displayed simultaneously with an image. A quick google search showed numerous solutions, and I present here the one I decided to use.

Noio Iconized Bookmarks Plugin by Thomas van den Berg

Get it here from the WordPress Plugin Directory

This is how I installed it:

• I uploaded the noico-iconized-bookmarks folder to my plugins folder.
• Actived the plugin.
• Configured the icons under Settings/N.I.B
• I then edited my sidebar theme file and replaced the WordPress function called wp_list_bookmarks() with the new function called list_iconized_bookmarks() (You can use the same arguments)
• Finally, I added a style for the image in my Stylesheet. ( I used the same style Thomas used.) Here is the exact code I added to my Stylesheet:
  
.favicon{display: block; float: left; position:relative; top: 3px; margin: 0 4px 0 0; width: 16px; height:16px;}

  You may need to tweak your theme styles to get it to display exactly how you want it to display.