I upgraded to WP 2.1 and am having a similar problem.
I followed the upgrade instructions, deleting the old files and then replacing them.
First, file uploads were giving me an error. I did a chmod a+w on the wp-content/uploads directory, which fixed that problem.
Now, I can upload files, but I can not post them using the file browser. It's a new (cool) interface, that gives me the same options as before (Upload, Browse, Browse All). I browse then click on the image I just uploaded, then I get a spiffy new window. Here I see a bigger thumbnail, an Edit link, Show: and Link To: radio buttons, but that's it. I don't see a button to insert the image into a post. Right now, I'm getting around it by manually inserting the image into the post using the img button in the visual editor.
Also since upgrading, iTunes no longer recognizes my podpress podcast feed, but I know that's an issue for a different forum. I would say be wary of upgrading! 5 minutes is not realistic when you consider testing, plugin compatibility, bug fixes, etc.
Thank you for any input!