The newly released Wordpress 2.5 does have one small bug in it related to image uploads. The new version takes advantage of some Java and Flash to run the image uploader that doesn't place nice with Internet Explorer 7. It seems to work fine with Firefox and on Macs, but PC's running IE 7 are having issues.
To fix the issue, do the following:
1) Clear your browser cache more than once, then reboot your whole computer.
2) Download these files, and upload them where they belong in your install on your server.
3) Make sure you have the newest Flash plugin for your browser.
Then you should be all set until then next update.