I had a similar problem and figured out that the culprit in my case was the tagaroo plugin v1.2.1. I disabled it and now it works just fine. With Tagaroo enabled whenever I clicked the insert image icon nothing would happen in either IE8 or Firefox3. So I re-installed, but that didn’t solve the problem. Then I found that in the dashboard clicking on the insert image button in the QuickPress section works fine! So I figured it must be some plugin that gets activated in the post editor. So I turned all off and then one-by-one turned them back on. That’s how I determined that the Tagaroo plugin was the problem for me. After deactivating it I am able to insert images without any issues.
Hope that helps someone,
David Vielmetter