Imagefield gallery and private files?

I'll try to be as detailed as possible:
I use lightbox2 with imagefield gallery and imagecache. Imagecache seems to work without any problems with private files - i see all presets perfectly fine.

I use imagefield gallery to display images uploaded using CCKs imagefield. In full node view I see images in a grid format (that is how imagefield gallery displays them - see example here http://www.worxco.com/imagefield-gallery-example). In this view the images are displayed fine (using an imagecache preset). Here's where the problems start.

1. When I click on any of the thumbnail images the lightbox fires up - the background goes dim in the usual way and the little circle starts spinning which means it is trying to load the file. After a few moments the circle stops spinning and I get an image of a crossed black camera which probably means it failed to load the file.

2. Now when I go to logs (admin/logs) I see the following error:
error type: page not found
location: http://mysite.com/system/files/system/files/albums/2008/image1.png

The location is weird because 'system/files' are repeated twice which shouldn't be the case (folder 'albums' and '2008' are within my private directory)

3. I presume there is a path error (I ftp-ed to my website to check that the file is actually properly uploaded - it is) and I went back to the full node view (the same as that one http://www.worxco.com/imagefield-gallery-example). Now the strange thing is that, upon hovering over an image, in the bottom bar of the browser I see

/home/myservername/private/albums/2008/image1.png
(where /home/myservername/private is the path to the private directory set up in admin/settings/file_system

instead of

http://mydomain.com/system/files/albums/2008/image1.png
(which is the format in which I see the links for all other uploaded files)

this leads me to believe that the paths are not displayed properly. Would anyone happen to have any idea what might be wrong? Thanks!