Your theme has not been updated to use the new image scaling features properly. WordPress 2.5+ allows themes to specify the width of their main content area. The reason for this is that commonly posting straight like photos and then getting annoyed when their images made the blog super wide. For this you have to do add this code in theme’s functions.php to make it compatible:
$GLOBALS[‘content_width’] = 800;
Replace 800 with the maximum width you want to allow an image to be in the main blog area.