Installation
Download category-images-ii.zip and extract on your computer. Upload the entire category-images-ii directory to your /wp-content/plugins directory. Log into the WordPress and click Plugins on the left side of the page. Under Actions (right side of the page) click Activate. Using FTP, visit the wp-content/upload/ folder and there should be a subfolder named category-images-ii. Set the permissions on this folder to allow for category images to be placed here. 777 should work.
Adding Category Images
Click the downward arrow to the right of Post (first item under Dashboard). Click Categories. To add an image to an existing category, click the category name to edit the category. Near the bottom of the edit category page, you will see “Upload a Category Image”. Click Browse. Navigate to the location of the image you wish to use on your computer. Select the image file and click Open. Click Update Category.