I recently had this problem too, and this is what solved it ...
When calling product thumbnails/images to the 'Product Management' section, (when you have 'Images Location' settings = File System (for both product thumbnails/product images) in the admin panel) ...
The pop-up window for product thumbnails/images in the Product Management page provides 3 options:
"file on this server"
"file on your local computer"
"file on the internet (enter image URL)"
If your store is in:
www.mydomain.com/store/[x-cart]
... and you want to use "file on this server", x-cart (version 4.1.
looks for those files in ...
www.mydomain.com/store/files/[images/subdirectories]
It looks for your images/image subdirectories (that you've uploaded via FTP) in the /files/ folder of your store.
Does this help?