Just had another go. Selected "Thumbnail" followed by "Select Image" and got the full size image dropped into the post! Repeated the process and got exactly the same result. Something is definitely borked somewhere.
I get the same thing; the full-sized image is inserted in the post; e.g:
http://design.chipbennett.net/oenology/2010/05/03/fire/
I'm unsure what that caption code is, or why it is displayed, for the image post format. But, whatever it is, it is incorrect based on user selection.