There was an itsy bitsy little spider in the image uploading page of the setup wizard. Actually it was a bug... which isn't really a specific type of problem as I thought for oh so long. A bug can be anything as simple as a way of saying something isn't working the way I thought it did.
Anywho.... this bug was giving some folks problems if they tried to upload more then one photo in the item creation wizard pages. It also didn't listen when you tried to change one image to the preview for the item. And gosh darn it, that little bug also wouldn't let you delete the image from the wizard pages.
Thank you Laura for pointing this out, we knew something was wrong, but we have been so tied down with this new shopping cart there was no time to try to figure it out.