Why are images not displaying?

Go resave your Permalink settings to correct the .htaccess file.

Multisite systems have a slightly different .htaccess configuration. Specifically, they have this line in them:

# uploaded files
RewriteRule ^([_0-9a-zA-Z-]+/)?files/(.+) wp-includes/ms-files.php?file=$2 [L]

That lets the /files/whatever URLs get routed to the proper location.

Edit: sorry, just noticed you’re using ISAPI Rewrite. Create a new rewrite rule in your config similar to the .htaccess rule above.