They completely reworked how uploaded files are handled in WordPress 2.0 - they're now put into folders by date to keep things nice and clean. Very nice touch. And thumbnails are automatically generated and linked if requested as well. Very cool. If it works, here's a screenshot of the image upload form from WP 2.0...
First, you upload a file:
Then, you select the uploaded file from the Browser, setting options like thumbnail/full or linking etc...
And then, you can use the fancy schmancy new WYSIWIG editor to resize the image by dragging, etc...
Update: The file /wp-admin/inline-uploading.php has hard-coded widths and heights (lines 81-85: max width 128 pixels, or max height 96 pixels) for the thumbnails to generate. It'd be really cool if this was a setting under the Options section, so I could have it create "thumbnails" that are 500px wide (what I typically use an Automator action to do on my computer before uploading).
I could modify the code myself (trivial to just hard-code my value in place of the defaults), but I'm sure others would like something similar, but with different values...