If you have problem with images, like when you hit button Image on bottom of a page, to upload picture, and it first displays upload button as a regular button but then quickly changes to the flat layout, then try under the Global Config settings, to turn off Flash upload option.
Taken from here.
Also, it seems that in Joomla 1.5.12 there is a bug for upload pictures, so if you have problems with try something like it is described here.
New edit, 
if you are still receiving error like:
- Warning: Failed to move file!
- Error. Unable to upload file.
- WARNFS_ERR02
- Error. Unable to upload file
Then check permissions, of folder where do you want to upload picture. Taken from my head 