I get exactly the same thing, tellyworth.
I have spent literally hours seaching for answers to the image problem, doing all the stuff they have come up with here, one by one, and none of it works. I tried refresh cache, clear cookies, latest version flash, and right clicking and reloading the upload screen--which by the way just exits your editor without saving it. In the last four days I have done everything EXCEPT blog.
The latest was to try different browsers. I sort of got it to upload some images in Internet Explorer. If you want the blow-by-blow details, I posted some descriptions and screenshots of Vista/Firefox, Vista/Internet Explorer and Vista/Safari.
The thing that makes the most sense is to use an external editor, since it's pretty apparent this one has enough bugs to keep these guys employed indefinitely. Maybe I'll try that next, but so far all these suggestions haven't been a very effective use of my time.
It would make even more sense for them to take this whole upgrade thing into Beta until they can get a stable version.