Tags do work…kinda….at least in version 1.3.5.
First, go to an image you have uploaded and add a tag in the field next to the image. You can then go to the tags section and see a list of all the tags you have. (Issue: If I click a tag link here, it brings me to a page not found.)
If you want to display a tag cloud on a page or post, then add the shortcode [ tagcloud ] to the page. Note, remove the extra space from around tagcloud to get this to work. (Issue: Once I click on a tag link, I get a page not found. If I add index.php before the link, then it works. I think this may be a problem with the .htaccess file)
Having the same issue here – expecting images with tags to appear in search results.
For example, if I tag a post, page or image, then when a user clicks on that tag in a tag cloud, or uses the tag in a search – then all the posts, pages and/or images with that tag should be displayed in the search results.
Hopefully Alex will implement this in an update soon 🙂