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GitHub User: emachnic
The 'images' folder is in the /app/assets directory. One thing to note though is that when Sprockets compiles, everything is then in a flat directory. From your stylesheets, you just need to call the url('image.jpg') and not url('../images/image.jpg'). If you have subdirectories in your images folder, you would do url('subdirectory/image.jpg') instead of url('../images/subdirectory/image.jpg').
Hope this helps anyone who is confused why their images aren't showing.