At the moment I have no images being picked up at the moment, and this is off a completely default Sitecore Xpress install.
I think this version is based on a 6.0 release
I have installed it on a XP machine (no images) and then tried running it through WebMatrix, still with no images.
I am at a loss really, and I have been grasping at straws a little.
Unfortunately I don't have much expirience with the Xpress edition.
But one thing is that you need to have the mime-types setup on the webserver for the .ashx's to work properly.
Though this should be done for the most common kinds, it's usually not done for .flv files, so they wouldn't work.
There will be some stuff registered in the web.config file about files types (at least in non Xpress editions) and also in App_Config/Filetypes.config (though the ones in the web.config will be commented out in the Filetypes.config and should stay that way).
I hope this can help somewhat.
