Does the user your application is running under have access to C:\? That's usually not the case; allowing an application context access to the root directory presents a big security risk.
Instead create a specific directory, for example c:\logs and give the ASP.NET application pool's user account full rights to that directory alone.
<httpHandlers>
<add verb="" path=".jpg" type="MyHandler.NewHandler,MyHandler"/>
</httpHandlers>
Is this just a layout problem of stackoverflow or did you omit the asterisk (*):
<httpHandlers>
<add verb="*" path="*.jpg" type="MyHandler.NewHandler,MyHandler"/>
</httpHandlers>
If it's not missing asterisk, I would try to see the Network tab in Firebug on Firefox (or use Fiddler - a http debugging proxy). What HTTP response code do you get from the call?