This was the answer for me

I was looking for a way of having the images in my posts show up in the excerpts of my homepage. I have used Thumbnails for Excerpts, which works okay, but only allows for a small square thumbnail, which did not work for me.

This plugin not only allows for the full size image to be displayed in the excerpt, but keeps WordPress from stripping out any other tags you want to keep in tack (links, text formatting, etc), making for a much more natural look to the excerpt.

It works fine for me with the latest version of WordPress. Highly recommended.