There are two problems:
1. If you want to display images in your category descriptions you have to replace category_description() in your theme with:
$category = get_the_category();
echo $category[0]->category_description;
2. If you want to add or update category descriptions with images using 2.9 you have to edit the database manually. It seems the admin interface is stripping images before saving to the database.
If you can use phpMyAdmin or similar try this SQL to get the relevant posts.
SELECT * FROM wp_term_taxonomy WHERE taxonomy = 'category';
Today I hate wordpress.