I have hundreds of images on my site but they are not showing up at all on the sitemap created.  Is there an option I need to check?  All of my files are .png and are linked directly from the pages so don't see how they are being missed.

Just got it working by changing the presets in the original scan website tab.

Now I have another question, which is really is site-specific.  I only use thumbnails on my pages and then link to a larger image.  The sitemap is creating an entry for the thumbnail and the larger image.  Is there anyway to just show the thumbnails, or will I need to edit the file by hand? I can't think of a filter that would exclude these images. Or does it not really matter?

If there is *any* kind of pattern to the thumbnails / full-size images, you can exclude them using output filter:
http://www.microsystools.com/products/sitemap-generator/help/website-crawler-output-filters/

I will be happy to help if you post your website URL. If you wish to have it remain private, email me the address!
http://www.microsystools.com/home/contact.php

In general I doubt it will matter much... But if you want Google to focus on certain images it makes good sense to only include those in the image sitemap I think