Image upload issues

ok, this is driving us nuts!!!

My husband and I just installed wordpress ver 2.5.1 for our gaming guild to use. While testing and learning how to use it, i discovered that we can’t seem to upload a picture to put into a post. He has the upload folder set as wp-content/uploads/images, and the permissions are set to allow anyone to upload. When I try, I get the browse button, find a picture, and see the progress bar. Once it gets done, I briefly see “Crunching” then get an HTTP Error and see “dismiss” on the end of the progress bar.

Anyone got any ideas or had the same issue that they fixed???

TIA!!

Nilea