I'm running MS Office 2007 on Windows 8. I used MS Office 2003 on Windows 7 before this and never encountered this problem. Note that this is a clean install of Office 2007, not an upgrade.
Two problems which may be inter-related:
The main problem I'm seeing is that whenever I paste an image in Word, I see only the bottom few pixels, as a horizontal row. The image is there, but somehow the Text Wrapping option around the image is broken, so I have to manually change it.
However, even after manually changing each image's property to 'Top and Bottom', I've not been able to get it to work exactly like it used to work in Word 2003. Copying and pasting images within the document places them in unintuitive places! (different pages, on top of the page itself, on top of another image, etc.)
Screenshots here: http://imgur.com/kPlCOHE