Everything was working infact, but maybe something happened to the server.
I have checked permissions, uploaded files are there and readable, and also can add new to the right directory in blogs.dir.
i have checked .htaccess and mod rewrite is enabled and working.
i have set the "Upload Path" to "wp-content/blogs.dir/5/files" and "Fileupload Url" and "Upload Url Path" to just "files".
i have read through this topic and seems to have covered everything but now i have no clue!!
The images do show if i put in the full path (wp-content...).