I found the solution and let me share with you what I did to achieve, but firstly you may find the following links useful (but not complete or descriptive enough) for further reference:
http://forums.microsoft.com/MSDN/ShowPost.aspx?PostID=566717&SiteID=1
http://forums.asp.net/t/1128842.aspx
http://forums.asp.net/p/993924/1296450.aspx
1. In order to be able see the images in development environment for web application projects, I downloaded and installed Crystal Reports service pack called "crvs05sp1.exe" from Business Objects site.
You cannot see the images when you publish the project. You can check the above links for various workarounds which almost none of them worked for me (or I did not understand them correctly). Having a special folder for the images and setting the ToolbarImagesFolder property of CrystalReportViewer can partially fix your problem: I managed to see the images on default page (which is public) but still had the problem with the authenticated pages. So, my finding is if you use authentication, it does not work.
2. Locate the folder C:\WINDOWS\Microsoft.NET\Framework\v2.0.50727\ASP.NETClientFiles\CrystalReportWebFormViewer3. This may depend on the version of your VS or CR. But mine is VS2005 SP1 so above is my folder. This folder and below has all the images you need.
3. Check if you have C:\inetpub\wwwroot\aspnet_client\system_web\2_0_50727. I had this folder but it was empty. You might need to create that if necessary.
4. Copy CrystalReportWebFormViewer3 and all of its sub folders and files under .../2_0_50727 folder. The final image path now becomes C:\inetpub\wwwroot\aspnet_client\system_web\2_0_50727\CrystalReportWebFormViewer3\images\toolbar and under the toolbar folder, you should have all the images.
5. Go to IIS server (mine is IIS7 - Vista default) and locate your web site. Right under your application, create a virtual directory called aspnet_client and map its physical directory to C:\inetpub\wwwroot\aspnet_client. Your newly created virtual directory should be at the same level as the bin directory.
6. Now, you are done. You should be able to see the images.
If you are an expert on Crystal Reports or someone who is competent on CR, would you mind checking my other post (http://forums.asp.net/t/1259751.aspx) on overflowing fields as seems like I am stuck with a problem and no one is helping me out...