I suspect that it is the insistence of WP7 that all pages loaded from the "local website" are actually loaded from IsolStorage.
The new Phonegap / Cordova WP7 project templates have a file supported for assembly, CordovaSourceDictionary.xml, which will do this for you. Just make sure that any files you want to use for upload / download (yes, you have to do this for images too) have a Build Actionion "Content" in your project, and when you create it, this xml will be updated automatically.
When your application launches the first thing that Cordoba does on WP7, browse all the files in this XML file and copy them to isolated storage so that they can be downloaded / moved.
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