I’m seeing something similar. I can upload images but when I try to put them in my blog, I only see the description or the title.
Some experimentation showed me that the url–not path–was wrong. I have wordpress installed in a directory called TRCnews. The link created by dragging an image from the browse window to the write window, leaves out TRCnews. When I put it in manually, the picture shows up.
I changed my wordpress url so that it was different from the blog url when I saw that I could see an image posted to the user account as server. I could then drag images fine, but I couldn’t create a new post because I hadn’t physically moved all of my files.
I changed everything back. My server seems to be assigning permissions correctly with a 755 folder permissiion. I just have to edit the html for images. Annoying, but it works. Not a big problem since I seldom actually added my own pictures this way.