The issue is not with images, but with the paragraphs.
Each image is wrapped in a caption, and that caption is properly tagged with .alignleft or .alignright. They are actually where they are supposed to be.
The problem is that not with the theme upgrade, but with your “Carousel of Post Images” plugin. Its style sheet contains the following code:
margin: 10px 0;
It is clearling the floats on every single paragraph, preventing the floats in the captions from wrapping.
You’ll need to ditch that plugin. It actually styles a lot of basic HTML elements, which is a bizarre thing for a plugin to do. That’s the theme’s job!
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