Hi,
You're obviously running on Winodws. I have several problems there myself but yours sounds like a permission gotcha specific to windows.
Look in your ray/modules/music/files or ray/modules/mp3/files directories and see if the files arrived. Mine were getting uploaded and arrived in the correct directories but had the wrong permissions on them. This lead to them returning a "file not found" error. If I fixed the permissions then they would show up. No amount of changing the permissions on the "files" directory will fix the problem.
The problem is that in PHP the files are first uploaded to the system temp directory, usually C:\Windows\Temp. The files take on the permissions of that temporary directory. It then gets moved to the final destination in music\files or MP3\files but the permissions are still those of the temp directory.
You need to set the temp directories permissions to ones appropriate to you site. Usually NETWORK SERVICE set with modify/read & execute/list/read/write permissions and IUSR to the same. ( This is assuming IIS7, IIS<7 uses IUSR_machinename)
That should solve that part of the problem.
I still have a problem with the Flash portion returning a error message that doesn't apply. It will display an Alert box with "Undefined" or with "File Upload Error". The error is in error. If I switch to All music the files are correctly there and work fine.