First off lets start with loading an XML file and reading its contents. I realize that there are much easier ways to load XML into Flash than this, but the advantage here is that I can use File.applicationResourceDirectory which allows me to target the installation directory for the XML file that was included with the AIR package. In this snippet I am using the synchronous open method. This essentially pauses everything else in the Flash movie until it has completed its task (opening the file).

import flash.filesystem.*;

private var _data:String; // Data string pulled from the xml file.

/**
 * Load the xml file and read its data.
 */
private function loadData():void
{
  var dataFile:File = File.applicationResourceDirectory.resolve("data.xml");
  var stream:FileStream = new FileStream();
  stream.open(dataFile, FileMode.READ);
  _data = stream.readUTFBytes(stream.bytesAvailable);
  stream.close();
}

This next snippet shows how to save data to a file using the asynchronous openAsync method. The asynchronous methods allow Flash to continue running normally and use events to trigger user specified actions.

private var _dataXML:XML;	// The XML data.

/**
 * Save the modified data to the xml file.
 */
private function saveData():void
{
  var dataFile:File = File.applicationResourceDirectory.resolve("data.xml");
  var stream:FileStream = new FileStream();
  stream.openAsync(dataFile, FileMode.WRITE);
  stream.writeUTFBytes(_dataXML);
  stream.addEventListener(Event.CLOSE, onDataSaved);
  stream.close();
}

/**
 * Called when the data has been successfully saved.
 * Load the saved data back into the application.
 */
private function onDataSaved(event:Event):void
{
  loadData();
}

If you are planning on using AIR (Apollo) for your own projects I would highly recommend reading Apollo for Adobe Flex Developers Pocket Guide by Mike Chambers, Robert L. Dixon & Jeff Swartz.

And now for the code:

package ca.flashdev.example {		

  import flash.display.Sprite;
  import flash.display.Shape;
  import flash.events.MouseEvent;
  import flash.text.TextField;
  import flash.text.TextFieldAutoSize;
  import flash.text.TextFormat;
  import flash.net.URLLoader
  import flash.net.URLRequest
  import flash.xml.XML
  import flash.events.Event;
  import flash.error.Error;

  public class BasicMenuXML extends Sprite {		

    // Create an XML list to hold the buttons.
    private var __menuList:XMLList;	 

    // External file loader.
    private var __loader:URLLoader;

    /**
     * The constructor. This method is fired
     * automatically when the class is instantiated.
     */
    public function BasicMenuXML():void {
      loadXML();
    }

    /**
     * Load the XML.
     */
    private function loadXML():void {			

      // Create a URL loader.
      __loader = new URLLoader();

      // Attach a listener to the loader.
      __loader.addEventListener(Event.COMPLETE, onXMLLoaded);

      // Load the xml file.
      __loader.load(new URLRequest("menu.xml"));
    }

    /**
     * Called when the XML has been loaded.
     * @param   event   The event that called this method.
     */
    private function onXMLLoaded(event:Event):void {

      // Put some error catching in case the XML is malformed.
      try {

        // Load the data into the XML object.
        var menuXML:XML = new XML(__loader.data);

        // Create a list of the buttons.
        __menuList = menuXML.button; 

        // Now that the XML is loaded create the menu.
        drawMenu();	

      } catch(error:Error) {

        // Display an error message.
        var errorMessage:TextField = new TextField();
        errorMessage.autoSize = TextFieldAutoSize.LEFT;
        errorMessage.textColor = 0xFF0000;
        errorMessage.text = error.message;
        addChild(errorMessage);
        return;
      }
    }

    /**
     * Draw the menu.
     */
    private function drawMenu():void {

      // This variable will hold the x position for the next button.
      var xPos:Number = 0;

      // Create a holder that will contain the menu.
      var menuHolder:Sprite = new Sprite();

      // Add the holder to the stage.
      addChild(menuHolder);			

      // Create text formatting for the text fields in the menu.
      var format:TextFormat = new TextFormat();
      format.font = "Verdana";
      format.color = 0x000000;
      format.size = 12;
      format.bold = true;

      // Loop through the list and create each button in the list.
      var count:int = 0;
      for each (p in __menuList) {

        // Create the button.
        var button:Sprite = new Sprite();
        button.name = "button"+count;

        // Disable the mouse events of objects inside the button.
        button.mouseChildren = false;

        // Make the sprite behave as a button.
        button.buttonMode = true;

        // Create the label for the down button state.
        var label:TextField = new TextField();
        label.autoSize = TextFieldAutoSize.LEFT;
        label.selectable = false;
        label.defaultTextFormat = format;
        label.text = __menuList[count].text();

        // Create a up state for the button.
        var up:Sprite = new Sprite();
        up.graphics.lineStyle(1, 0x000000);
        up.graphics.beginFill(0x00FF00);
        up.graphics.drawRect(0, 0, 100, 30);
        up.name = "up";

        // Create a over state for the button.
        var over:Sprite = new Sprite();
        over.graphics.lineStyle(1, 0x000000);
        over.graphics.beginFill(0xFFCC00);
        over.graphics.drawRect(0, 0, 100, 30);
        over.name = "over";

        // Adder the states and label to the button.
        button.addChild(up);
        button.addChild(over);
        button.addChild(label);				

        // Position the text in the center of the button.
        label.x = (button.width/2) - (label.width/2);
        label.y = (button.height/2) - (label.height/2);

        // Add mouse events to the button.
        button.addEventListener(MouseEvent.MOUSE_OVER,
                                  displayActiveState);
        button.addEventListener(MouseEvent.MOUSE_OUT,
                                  displayInactiveState);
        button.addEventListener(MouseEvent.CLICK, displayMessage);

        // Add the button to the holder.
        menuHolder.addChild(button);

        // Position the button.
        button.x = xPos;

        // Increase the x position for the next button.
        xPos += button.width + 2;

        // Hide the over state of the button.
        over.alpha = 0;

        // Increase the count.
        count++;
      }

      // Postion The Menu.
      menuHolder.x = 20;
      menuHolder.y = 20;

    }

    /**
     * Show the active state of the button.
     */
    private function displayActiveState(event:MouseEvent):void {

      // Hide the over state of the button.
      event.currentTarget.getChildByName("over").alpha = 100;
    }

    /**
     * Hide the active state of the button.
     */
    private function displayInactiveState(event:MouseEvent):void {

      // Show the over state of the button.
      event.currentTarget.getChildByName("over").alpha = 0;
    }

    /**
     * Display a message in the Output window.
     */
    private function displayMessage(event:MouseEvent):void {

      // Output the name of the clicked button.
      trace(event.currentTarget.name)
    }
  }
}

Save this file as BasicMenuXML.as in a folder structure of ca.flashdev.example.
Create a new movie and add ca.flashdev.example.BasicMenuXML to the ActionScript 3.0 Settings Document class field. Save this file as basicMenuXML.fla in the same directory as your ca folder. Publish (Ctrl+Enter) your movie and you should see the menu.

Download the source files