>>In the referenced demo, is the image being loaded from the clients system without a postback?
Yes.
>>Is there source code available for this demo?
Yes.
Please check the following projects:
AdvancedCS20-MicrosoftAjax
AdvancedCS20 *
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AdvancedCS20-NoAjax
asp.net Chat http://cutesoft.net/ASP.NET+Chat/default.aspx
Web Messenger: http://cutesoft.net/Web-Messenger/default.aspx
asp.net wysiwyg editor: http://cutesoft.net/ASP.NET+WYSIWYG+Editor/default.aspx
asp wysiwyg html editor: http://cutesoft.net/ASP
asp.net Image Gallery: http://cutesoft.net/ASP.NET+Image+Gallery/default.aspx
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