I have narrowed this down and can repro this. It seems to have something to do with the use of the SilverLight toolkit for Windows Phone 7 and the use of the transitions they provide.
Using this combination below causes the issue:
//RootFrame = new PhoneApplicationFrame();
If i remove the use of their frame, the control is styled correctly:
//RootFrame = new TransitionFrame();
You can get the Silverlight toolkit from here: http://silverlight.codeplex.com/
Do you know why this might be the case? It seems strange that these two control sets wont play nicely together.