Looking at your account, I noticed that you have only Sitefinity 3.5 downloaded. The instructions which you have followed do not apply to Sitefinity 3.5. Still the problem should be related to the configuration of the IIS5 server.
Since Sitefinity 3.5 is using default asp.net handlers for items in the Images and Documents module (ashx), therefore it is not really necessary to do any additional settings in order to have the images displayed.
Could you elaborate on your settings about these handlers?
the Telerik team
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