I’m running WordPress locally on 2 machines (one XP, one Vista) while I learn how to create WP themes. The image resizing thing was driving me nuts too, but the other guys are right, it’s the php-gd library.
I searched for gd in my php.ini file and found
;extension=php_gd2.dll
i took out the semi-colon
extension=php_gd2.dll
restarted apache et voila! the image sizes work on upload and are no longer greyed out. however, images i inserted into my gallery before this time still only have the original size available.